Comparative Miracles: A Study of the Wirtschaftswunder and the Milagro Español

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Comparative Miracles: A Study of the Wirtschaftswunder and the Milagro Español

  1. 1. GEORGETOWN UNIVERSITY COMPARATIVE MIRACLES: A STUDY OF THE WIRTSCHAFTSWUNDER AND THE MILAGRO ESPAÑOL GEST 507: EUROPEAN ECONOMY DR. HOLGER WOLF BY SEAN P. MCBRIDE WASHINGTON, DC 15 DECEMBER 2009 AD MAIOREM DEI GLORIAM
  2. 2. McBride, 1 Introduction The period between the end of the Second World War and the oil crisis of 1973 was a time of tremendous growth in Europe. While the German Wirtschaftswunder is the most well-known example, similar economic phenomena occurred simultaneously in other European states such as France and Italy. Initially, Franquist Spain presented a substantially different model. While Germany, France, and Italy benefited from Marshall Aid and the boom brought about by the Korean War, Spain remained a pariah in the international political system and the global economy. The contrast stuck many Spaniards, who began to demonstrate against their economic austerity. In order to stabilize Spain, Franco began to institute economic liberalization in the early 1950s through technocratic ministers belonging to the mysterious Opus Dei. Following this dramatic reversal in economic policy, Franquist Spain achieved the highest growth rates experienced in Europe and second only to Japan worldwide.1 In contrast to the popular American perspective that characterizes the Marshall Plan as the sole cause of the postwar European economic miracles, this paper neither fully discounts nor overemphasizes the role of the United States. The United States clearly played an essential role in shaping the security arrangements and political structures of postwar Europe, but US financial aid through the Marshall Plan and the Pact of Madrid simply was too small to be alone responsible for the subsequent economic booms. Rather this aid primarily assisted with balance of payment issues, ensuring that free trade continued to flow throughout Europe. Furthermore, in the case of Spain, direct aid from the United States was complemented by remittances and tourism connected with West Germany and the other West European states. While the United States necessarily appears in this paper in passing, this is ultimately an examination of the German Wirtschaftswunder and the Milagro Español from the West European perspective. This paper seeks to examine these two very different postwar economic experiences in order to identify their linkages. This paper uses West Germany as the basis of comparison to Franquist Spain because of their similar experiences from 1936- 1945. Franco came to power through the direct intervention of Hitler in Spanish Civil 1 Joseph Harrison, The Spanish Economy in the Twentieth Century (Beckenham: Croom Helm Ltd., 1985), 144.
  3. 3. McBride, 2 War, and many of Franco's political and economic systems were based off the Third Reich.2 Despite these similarities, Franquist Spain and West Germany followed dramatically different paths post 1945. With the total destruction of Nazi Germany creating a virtual tabula rasa, the zones that became West Germany underwent simultaneous democratization and economic growth under the political leadership of the Christian Democrats and the economic expertise of Ludwig Erhard (and the supervision of the American occupiers-turned-allies). Spain remained under a totalitarian dictatorship under the Caudillo Francisco Franco. Though General Franco was substantially more pragmatic and less ideological than Adolf Hitler, institutions such as the Falange [the Spanish Fascists] persisted after the defeat of Germany. Nevertheless, Franco practiced his own form of denazification by shifting power from the Falange to the Catholics and the Monarchists.3 Similar events occurred in the economic realm. For the first years of the postwar period, Spain languished under conditions of enforced economic autarky. However, after the German Wirtschaftswunder demonstrated the potential for rapid growth (which also subsequently led to increased internal Spanish dissent over economic conditions), Franco chose a cadre of economic technocrats from the secretive Opus Dei to open the Spanish economy along the German model.4 Unbeknownst at the time, this decision to pursue economic liberalization could not occur in a vacuum. Rapid economic changed brought about dramatic social changed in Spain, which directly led to the rapid democratization of Spain following Franco's death under King Juan Carlos. In contrast to West Germany, where political and economic liberalization developed side by side, Franquist Spain's rapid economic liberalization first occurred under an authoritarian system. This economic liberalization led to a social democratization of the country, but political democratization remained impossible until the death of Franco in 1975. The objective of this paper is to outline the narratives of the two 'miracles' in order to identify their interrelationships. This author admits that this paper purposely 2 Paul Preston (ED). Spain in Crisis: The Evolution and Decline of the Franco Regime (New York: The Harvester Press Unlimited, 1976), 85. 3 Joseph Harrison, The Spanish Economy from the Civil War to the European Community (London: Macmillan Press Ltd., 1993), 20. 4 Paul Preston, Franco: A Biography (New York: Harper Collins, 1994), 669.
  4. 4. McBride, 3 distorts the complex economic picture by focusing solely on the bilateral economic relationship between Spain and Germany. In reality, France and the other Western European states played similar roles in their relationship with Spain. Nevertheless, the exclusion of these other countries detracts little from the narrative, as a country like France interacted with Spain much the same as Germany interacted with Spain, although typically to a slightly lesser degree. Economic policy and performance naturally play the largest roles of this narrative, but they do so in an analysis of their respective political economies. Key thematic questions include the degree to which implementation of economic policy differed between democratic West Germany and autocratic Franquist Spain, how the previous economic boom in West Germany helped lead to the subsequent boom in Spain, and the different effects that this economic growth had on the political systems of each state. German Wirtschaftswunder “Die Geschichte der Bundesrepublik Deutschland ist vor allem ihrem Wirtschaftsgeschichte” ~Wirtschaftsgeschichter Werner Abelshauser, 19835 The term Wirtschaftswunder largely implies that the economic growth in West Germany following the Second World War somehow surpassed all understanding. This is certainly not the case. It is also inappropriate to simply characterize the economic boom as the “inevitable result of the famous German Tüchtigkeit.”6 Rather, the German economic growth was due to a multiplicity of different economic factors and circumstances, some of which were a result of German policy, and some of which were due to external conditions outside of the direct control of German policymakers. Unbeknownst to the German Volk, who at Stunde Null [zero hour] stood atop the rubble of Hitler’s fallen Reich, many of the terrible events of German defeat and occupation directly would lead to the economic growth of West Germany. As events behind the Iron Curtain led to the escalation of what would become the Cold War, Britain, France, and the United States changed their policies from suppressing the 5 Michael von Prollius, Deutsche Wirtschaftsgeschichte nach 1945 (Berlin: Vandenhoeck & Ruprecht, 2006), 9. 6 Henry C. Wallich, Mainsprings of the German Revival (New Haven: Yale University Press, 1955), 2.
  5. 5. McBride, 4 German menace to building up a credible pro-Western German client state. Excluding those caught in the Soviet sphere, the Central European menace became anchored to the West as an ally. This policy shift among the Western occupation forces led to two important decisions. The first crucial Allied decision was to abandon the wartime Morgenthau Plan to keep Germany permanently divided, and instead to unify the Western zones of occupation into the Bizone and then the Trizone.7 The second crucial decision was the U.S. creation of the European Recovery Program, also know as the Marshall Plan. Between 1948 and 1952, this program provided West Germany the equivalent of 1.4% of its GNP.8 In contrast to other European countries, Marshall Aid was a relatively less important factor in the Wirtschaftswunder. It however did alleviate the West German balance of payments problem that lasted until 1950. It is important to balance the discussion of external factors that favored German recovery with the particular conditions of German economic and human capital. This has commonly been referred to as German Tüchtigkeit. Despite initial fears about the permanent partition of the internal German market, West Germany emerged on relatively solid footing for its economic boom. This area managed to retain 61% of the industrial capacity of Germany within an area that had previously only had 56% of the German population.9 The most significant loss was the bread-basket of East Germany, but this in fact had little impact on redevelopment. While the industrial areas of West Germany previously paid for tariff-protected grain from the east, now they bought grain more cheaply from the world market. Similarly, war damage was not as bad as previously thought. Germany built more plant during the war than it lost due to war damage, leading it to be comparatively stronger than when it started the war.10 Furthermore, much of the plant was of a newer type, meaning that West German industry was well-placed to quickly resume competition on the global market. Because Germany primarily focused on capital goods, which were highly demanded after the calamitous war, it was able to get around tariffs to a greater degree than other countries. Ironically, postwar 7 Prollius, Deutsche Wirtschaftsgeschichte nach 1945, 17. 8 Herbert Giersch et al., The fading miracle: Four decades of market economy in Germany (Cambridge: Cambridge University Press, 1992), 98. 9 Wallich, Mainsprings of the German Revival, 282. 10 Prollius, Deutsche Wirtschaftsgeschichte nach 1945, 21.
  6. 6. McBride, 5 reconstruction was needed following a war largely brought about by German designs, and the industry of vanquished Germany was well placed to provide the machines needed for this reconstruction. Despite the terrible casualties of the two world wars, demographics in West Germany were comparatively well placed for an economic boom. The 10 million refugees from Eastern Europe and the “large crop of Hitler babies” that entered the workforce in the postwar period helped maintain the proportion of the working age population.11 This large influx of workers initially meant high structural unemployment (as high as 26.3% in Schleswig-Holstein in 1950),12 but it also exerted downward pressure on wages as the refugees gradually trickled into the industrial centers. This downward pressure caused higher profits and more investment, leading to a more rapid expansion of plant capacity.13 Though social responsibility towards the unemployed was likely not the sole reason for the restraint of German organized labor in seeking wage increases, the overall effect of wage moderation allowed firms to invest high proportions of their profits brought about by increases in labor productivity.14 The combination of these demographic factors and the restraint of the German labor force assisted the build- up of industry, which in turn led to increases in labor's standard of living. German political stability under the leadership of the pro-Western pro-Market Christian Democrats was a crucial element for economic growth. Kondrad Adenauer and Ludwig Erhard were the two most important figures in steering the German economy towards this stability. First as an advisor to the Bizone, and then as the Economics Minister and Chancellor of the Federal Republic of Germany, Ludwig Erhard, with the support of the Ordoliberals, was largely responsible for steering the West German economy though the Wirtschaftswunder. His most important policy was to stabilize the postwar economy through drastic currency reform and the abolition of price controls. Erhard’s logic was that “the only rationing ticket the people will need will be the deutschemark[,] and they will work hard to get these deutschemarks.”15 With the 11 Wallich, Mainsprings of the German Revival, 10. 12 Giersch, The fading miracle: Four decades of market economy in Germany, 48. 13 Wallich, Mainsprings of the German Revival, 284. 14 Giersch, The fading miracle: Four decades of market economy in Germany, 72. 15 Edwin Hartrich, The Fourth and Richest Reich (New York: Macmillan, 1980), 4.
  7. 7. McBride, 6 approval of the Western occupation authorities, Ludwig Erhard enacted currency reform that replaced the Reichsmark with new Deutsche Mark. Often pointed to as one of the most important triggers of the Wirtschaftswunder, this reform effectively contracted the money supply and reorganized public and private debt.16 According to the Yale economist Henry Wallich, this currency reform: “transformed the German scene from one day to the next. On June 21, 1948, goods reappeared in the stores, money resumed its normal function, black and gray markets reverted to a minor role, foraging trips to the country ceased, labor productivity increased, and output took off on its great upward surge.”17 This quote is likely a bit overblown, but by most accounts the currency reform was very successful in preparing the Germany monetary system for recovery. Following the 1948 currency reform, the German economy began to experience a rapid rise of unemployment. By 1950, this figure had climbed above 12.2%.18 Fortunately, just as political pressure was beginning to turn against the Erhardt reforms, external factors related to the Cold War led to further favorable conditions for German growth. Following the North Korean invasion of South Korea, the United States found itself in an unanticipated major military conflict, which in turn led to a sudden rise in demand for military equipment. Due to the ongoing reconstruction in Europe, most industrial capacity was effectively booked, except in Germany. With little economic competition, German exporters were able to divert their excess capacity towards filling urgent military orders. This Korea boom marked the true beginning of Wirtschaftswunder, a period of tremendous growth that lasted until the oil shocks of 1973. Just as Marshall Aid began to recede, the Korea boom provided a crucial boost to the West German export industry in sectors such as machinery and other capital equipment.19 Whereas West Germany had previously dealt with underutilization of its capital stock, firms suddenly needed additional capital equipment, which itself led to a virtuous cycle of investment. In this 1950s alone, real GDP more than doubled and output per worker increased by around 16 Prollius, Deutsche Wirtschaftsgeschichte nach 1945, 72. 17 Wallich, Mainsprings of the German Revival, 71. 18 Prollius, Deutsche Wirtschaftsgeschichte nach 1945, 87. 19 Wallich, Mainsprings of the German Revival, 87.
  8. 8. McBride, 7 75%.20 By the beginning of the 1960s, the West Germany had undergone substantial changes. After reaching full employment, the German economy began to face a labor shortage, causing it to rethink its labor policies. German firms became the dominant producers of capital goods, leading them to look for new export markets and investment opportunities. The German people became more prosperous, making them long for a vacation on the beach. In response to each of these new challenges, Germany turned to the Iberian peninsula. Spanish Economic Miracle “A Franquist type of dictatorship may continue for decades in Spain and by so doing may provide a “model” for other nations that achieve a minimum of economic prosperity in the absence of strong traditions of political liberty.”~Historian Stanley Payne21 At the beginning of the 1950s, the Spanish economy and people were starving. As Caudillo of Spain, Generalissimo Francisco Franco had pursued a policy of Spanish autarky. In the interest of import-substitution, the exportation of Spanish goods was penalized, which led Spanish businesses to focus on the domestic market.22 The exclusion of foreign firms led to a low level of competition, which maintained Spanish inefficiencies and high production costs relative to other European states. As a result of these policies, the Spanish economy remained in the doldrums and the Spanish people experienced food shortages and rationing on a massive scale.23 This economic suffering worsened following the end of WWII, when Spain became isolated by the postwar international community due to its former close relations with the Axis powers. Starved of foreign credit and cut off from Marshall Aid, Spain descended into what was called the hunger decade.24 A crucial prerequisite of renewed Spanish growth was foreign diplomatic recognition and financial assistance. Luckily, the Cold War intervened on behalf of the Franco regime and the Spanish people. Following the coup in Czechoslovakia and the 20 Giersch, The fading miracle: Four decades of market economy in Germany, 63. 21 Stanley G. Payne, The Franco Regime 1936-1975 (Madison: The University of Wisconsin Press, 1987), 536. 22 Sima Lieberman, Growth and Crisis in the Spanish Economy 1940-93 (New York: Routledge, 1995), 31. 23 Preston, Spain in Crisis: The Evolution and Decline of the Franco Regime, 90. 24 Jean Grugel and Tim Rees, Franco’s Spain (New York: St. Martin’s Press, 1997), 111.
  9. 9. McBride, 8 Berlin blockade, relations between the Western powers and the USSR greatly soured. As the anti-Fascist allies turned on each other, the relations between the anti-Communist Caudillo and the Western Allies began to thaw. Gradually accepting Franco’s propagandistic reinterpretation of World War II, in which Franco had opposed Hitler and served as the silent ally of the West by protecting Gibraltar,25 the Western nations gradually backed down from their attempts at regime change. Realizing that the Franco regime would continue to be a European player in the future, the United States, France, and England began in 1948 to provided credits to help Spain buy capital equipment.26 The Korean conflict was the turning point in ending Spain’s isolation. Though unable to economically benefit from the boom in war demand, Franco’s agreement to send troops to fight in Korea paid substantial political dividends. Immediately following this decision, the US Senate authorized additional loans to Spain, totaling some $62.5 million.27 The culmination of these diplomatic developments was the Pact of Madrid, in which Spain leased the United States several naval bases in exchange for economic and military development aid totaling $125 million annually.28 With this military pact signaling the official end of Spain’s isolation, other forms of foreign aid began to reach Spain as well, totaling some $1.68 billion between 1953 and 1963.29 This aid played a significant role in reducing Spanish inflation (down to 4.3% between 1951 and 1956), ending food rationing,30 and boosting Spain’s electrical production, which it turn led to a growth of manufacturing. By the beginning of the 1950s, Franquist Spain had successfully overcome foreign isolation and had gained international acceptance and aid. Despite this foreign aid, the Franco regime faced a serious internal threat to its continued existence due to its autarkic economic policies. Tired of ten years of starvation, food rationing, and economic backwardness, strikes and internal dissent began to seriously threat to law and order. Much of this dissent originated from Catalonia, typically considered the industrial center of Spain. In January 1951, Catalan workers 25 Luis de Galinsoga, Centinela de Occidente (Semblanza biográfico de Francisco Franco) (Barcelona: Editorial AHR, 1956). 26 Lieberman, Growth and Crisis in the Spanish Economy 1940-93, 39. 27 Harrison, The Spanish Economy from the Civil War to the European Community, 32. 28 Grugel, Franco’s Spain, 111. 29 Lieberman, Growth and Crisis in the Spanish Economy 1940-93, 41. 30 Harrison, The Spanish Economy in the Twentieth Century, 156
  10. 10. McBride, 9 staged a series of strikes in protest against the continued rationing of foodstuffs.31 In March, a Catalan protest against increased public transit fares gradually spread to the Basque region and escalated into a mass strike.32 Between 1951 and 1956, this labor unrest became progressively more intense. Following a sudden 20% price rise in 1956, labor unrest spread to the central pillars of the Franquist regime: the Catholic Church, the Movimiento Nacional, and the Army. The Bishop of Malaga complained against the “collective unconsciousness” of the upper class.33 The Movimiento began to split into its Monarchist and Fascist element. General Grandes told Franco that unless he restores order, the Army would seize control of Madrid.34 Realizing his desperate situation, Franco replaced three members of his cabinet in 1957 with technocratic elites that belonged to the mysterious Opus Dei organization and tasked them to carry out the economic policies needed to ensure the survival of his regime. Working with the International Monetary Fund (IMF) and the Organization for European Economic Cooperation (OEEC), these men developed the Economic Stabilization Pact of 1959, which the reformers characterized as: “economic policy so as to direct the Spanish economy in conformity with the policies of the nations of the western world and to liberate it from public interventions, inherited from the past, which no longer support the needs of the present situation.” 35 The liberalizing reforms of the pact were quite numerous and varied. First, the Opus Dei technocrats set an 80 billion peseta ceiling on public spending in order to reign in high inflation. Second, they balanced the budget and made the Bank of Spain independent of the Franquist regime. Third, they liberalized the labor market in order to ensure that pay raises would no longer be used as a means to buy off political dissenters. Forth and most importantly, they liberalized foreign trade by bringing Spain in line with the rules of the International Monetary Fund.36 Following the 1960 depression that accompanied the structural shifts needed to compete on the global market, the Spanish economy started to feel the positive effects of 31 Lieberman, Growth and Crisis in the Spanish Economy 1940-93, 38. 32 Harrison, The Spanish Economy in the Twentieth Century, 138. 33 Lieberman, Growth and Crisis in the Spanish Economy 1940-93, 46. 34 Lieberman, Growth and Crisis in the Spanish Economy 1940-93, 47. 35 Lieberman, Growth and Crisis in the Spanish Economy 1940-93, 51. 36 Harrison, The Spanish Economy in the Twentieth Century, 147.
  11. 11. McBride, 10 the Stabilization Pact of 1959. The liberalized imports of capital goods, a more rational exchange rate, and increased sources of foreign currency primed the Spanish economy for its miracle. Foreign currency came from a variety of sources. First, many Spaniards refused to wait for an economic miracle to happen in Spain, and left to work in West Germany.37 These Spaniards working abroad sent remittances home, thereby providing Spain with a supply of deutsche Marks. Even more important was the influx of tourists into Spain. These tourists served the dual purpose of providing Spain foreign currency and encouraging Spaniards to copy the consumption patterns of their foreign visitors.38 Appendix three shows the dramatic increase in income that Spain derived from tourism. Most notable is that this income increased by a magnitude of ten from around $90 million in 1958 to $900 million in 1964.39 Many of these tourists were in fact Germans and other West Europeans, who finally had earned enough money to afford to vacation. These incoming sources of foreign currency financed Spain’s importation of capital goods, which in turn led to higher productivity in Spanish firms and higher income for Spanish workers. Spain’s large surplus of agricultural laborers provided the lion share of labor for this economic growth. In addition to the external migration that brought in foreign currency, massive internal migration from the pueblos to the main industrial centers kept labor costs low and led to rapid industrialization.40 The 1959 Stabilization Pact was by no means the end of Spanish internal dissent. Until Franco’s death in 1975, the Franquist regime continued to face numerous internal threats. Due to the economic success of the Opus Dei reforms, Franco repeatedly expanded the presence of these technocrats within his cabinet as a countermeasure against threats to his regime. Effectively in control of the government, these advisors continued their program of economic reform, including the establishment of a national minimum wage and the formation of economic development plans. 41 Ultimately, these economic reforms could not address the increasing social democratization occurring in Spanish society. Following the death of the Caudillo, the Spanish people quietly 37 Harrison, The Spanish Economy from the Civil War to the European Community, 32. 38 Lieberman, Growth and Crisis in the Spanish Economy 1940-93, 71. 39 Harrison, The Spanish Economy in the Twentieth Century, 155. 40 Harrison, The Spanish Economy in the Twentieth Century, 159. 41 Lieberman, Growth and Crisis in the Spanish Economy 1940-93, 68.
  12. 12. McBride, 11 entombed the Franquist regime with Franco, rapidly transitioning to democracy and full membership in the European Economic Community under the guidance of King Juan Carlos. Comparison of West German and Spanish Growth In order to put the West German and Spanish economic miracles in proper perspective, it is critical to view them in terms of previous economic performance. West German industry actually emerged from the end of WWII in stronger economic conditions than when it entered it, leading the West German economy to rebound to prewar levels relatively quickly.42 In contrast, the economy of Franquist Spain did not regain the 1936 GDP of the Spanish Republic until 1949.43 Appendix Two demonstrates the nature of this relationship. During the period from 1944 to 1947, the West German economy declined precipitously while the Spanish economy remained relatively stable, causing the Spanish GDP to grow relative to the German GDP from 14% to 41%. Due to the German Wirtschaftswunder and relative Spanish stagnation until 1959, the relationship returned to around 17% by 1960, after which the 1959 Stabilization pact and the subsequent Milagro Español brought Spanish GDP up to around 30% of West German GDP. Because of the immense difference in GDP between Spain and West Germany in 1960, it is logical that the Spanish economic miracle occurred at such a rapid rate once the required political and social conditions were in place. After the liberalization of the Opus Dei, Spain opened itself to the same external economic conditions that West Germany experienced, but it also had the significant advantage of cheap labor due to previous underdevelopment. Spanish growth should therefore be viewed relative to that of Germany, demonstrating that the period of these two economic miracles was an important convergence of the Spanish and West German economies. Spanish Gastarbeiter Following the Korea boom, West Germany experienced dramatic changes in its labor market. In contrast to 1950, when unemployment topped twelve percent,44 42 Prollius, Deutsche Wirtschaftsgeschichte nach 1945, 21. 43 Grugel, Franco’s Spain, 111. 44 Prollius, Deutsche Wirtschaftsgeschichte nach 1945, 87.
  13. 13. McBride, 12 unemployment between 1960 and the 1973 oil shock was well below 1.5% (and even below one percent in 1961-6 and 1969-71).45 During the early years of the boom, West Germany benefited from the labor surplus provided by the refugees from Central and Eastern Europe. However, following the 1961 closure of the Berlin Wall, the previously important source of refugee laborers out of East Germany dried up. Without reserve workers to bring into the economy, the West German labor supply gradually became inelastic.46 Overemployment began to have negative effects on the West German economy, as the new jobs created by economic booms could not be filled, threatening to stymie growth. The solution to this problem was the implementation of the Gastarbeiter [guest worker] program, through which, foreign workers provided West Germany with needed labor elasticity. Generally foreigners moved into manufacturing and construction, while Germans moved from those fields into government and the service sector. Spaniards were one of the many groups to travel to West Germany to work in a blue-collar capacity. The Stabilization Plan of 1959 itself sought to encourage Spaniards to leave the country in search of work, using emigration as a control valve for political discontent and a means of gaining foreign currency through remittances.47 Many of these guest workers were unskilled laborers that left areas of surplus agricultural labor, including Andalusia, Galicia, and Extremadura.48 Varied estimates place the number of Spanish émigrés from 1960-1973 between 2.3 and 3 million, of whom around a third went to West Germany.49 Both West Germany and Spain benefited from this arrangement. Most importantly, Spain received remittances accounting for 17.9% of its trade deficit.50 This money helped Spain to fund its much-needed importation of capital goods from West Germany. Spain also received the added benefit of ensuring the gainful employment of 2.3 to 3 million idle farmhands, who likely would otherwise have threatened Spain’s domestic peace. Germany in turn received an influx of Spanish workers that helped 45 Wallich, Mainsprings of the German Revival, 126. 46 Giersch, The fading miracle: Four decades of market economy in Germany, 128. 47 Harrison, The Spanish Economy in the Twentieth Century, 156. 48 Harrison, The Spanish Economy from the Civil War to the European Community, 32. 49 Ibid. 50 Harrison, The Spanish Economy in the Twentieth Century, 156.
  14. 14. McBride, 13 provide labor-supply elasticity. In the upswing of 1963-5, almost 70% of the new jobs were filled by guest workers, which later rose to 85% of the 1.7 million new jobs created from 1969-73.51 Spanish guest workers also importantly absorbed some of the cultural norms of their host country, thereby acting as a sort of cultural conduit between West Germany and Spain. Both related to the Wirtschaftswunder and the Milagro Español, these Spanish Gastarbeiter demonstrate the close interrelationship between the two economic miracles. German Tourists Spain has over 5,000 miles of coastline and countless beaches, making it well- suited as a tourist destination. Germany has historically been one of the largest groups to vacation in Spain, which is understandable given the German climate. Of further benefit to the West Germans was the highly-favorable exchange rate between the deutsche Mark and the devalued peseta, which encouraged West Germans to vacation in Spain.52 Between 1959 and 1973, around 260 million tourists visited Spain,53 around 30% of which were German.54 Between 1961 and 1969, earnings from tourism funded 73.5% of the Spanish trade deficit, which increased to fund over 100% from 1970 until the 1973 oil crisis. In addition to this financial benefit, foreign tourism promoted substantial infrastructure development throughout the coastal areas, which in turn facilitated the growth of the hotel, construction, transport, and commerce sectors of Spain.55 This transformation of Spain into one of West Germany’s favorite vacation spot was absolutely essential for Spanish development. Spain let bikini-clad Germans lounge on their beaches in order to finance the purchase of German capital goods. Foreign Direct Investment Through the 1959 Stabilization Plan, Spain greatly relaxed its restrictions on foreign direct investment. Legally, investors did not need prior permission from the government to invest as long as they did not possess more than 50% of the total capital of 51 Giersch, The fading miracle: Four decades of market economy in Germany, 128. 52 Lieberman, Growth and Crisis in the Spanish Economy 1940-93, 71. 53 Harrison, The Spanish Economy in the Twentieth Century, 155. 54 Teresa Garín Muñoz, “German demand for tourism in Spain,” Tourism Management 28 (2007): 12. 55 Harrison, The Spanish Economy in the Twentieth Century, 156. Lieberman, Growth and Crisis in the Spanish Economy 1940-93, 71.
  15. 15. McBride, 14 a Spanish firm.56 Although ownership was legally capped at 50% ownership, outside factors such as technical and commercial assistance nonetheless often led foreign investors to gain de facto control of Spanish firms. Investors further were allowed to repatriate their profits immediately and their investments within two years.57 For these reasons, foreigners started to invest heavily in Spanish firms, driving investment from 964 million pesetas in 1959 to 4.7 billion pesetas in 1964.58 This fact led the economist Sima Lieberman to conclude that Spanish industrialization was not the success of Spanish policies or entrepreneurs, but “simply an extension of industrial revolutions which had occurred in other countries.”59 As West Germans accumulated savings, they began to make foreign investments. Following the 1959 reforms, Spain was a very popular place to invest. Throughout the period of the Spanish boom, West Germany accounted for 11.9% of all direct foreign investment, exceeded only by the United States.60 German investment was particularly strong in the chemical and motor-vehicle industries, areas typically associated with Germany. Interestingly, it was precisely these areas with close ties to German investors that preformed the best within the Spanish economy, with Chemicals growing at 14.4% annually and automobile production growing at 21.7% annually from 1958-72.61 Considering that the Germans were just through their own boom, this level was significant. This investment provided Germans with rates of return higher than available in West Germany at the time, and it provided Spanish industries with much needed capital, technology, and productivity. German Capital Goods Both West Germany and Franquist Spain suffered from similar balance of payment issues during the early period of their economic miracles. West Germany was assisted in this regard by the Marshall Plan, but Spain instead had to rely on other forms of developmental aid, remittances from Spaniards abroad, foreign currency from 56 Lieberman, Growth and Crisis in the Spanish Economy 1940-93, 53. 57 Ibid. 58 Lieberman, Growth and Crisis in the Spanish Economy, 72. 59 Lieberman, Growth and Crisis in the Spanish Economy, 105. 60 Harrison, The Spanish Economy in the Twentieth Century, 156. Switzerland technically also had a higher rate of investment, but much of this money was actually coming from Spaniards’ Swiss bank accounts. 61 Harrison, The Spanish Economy in the Twentieth Century, 160
  16. 16. McBride, 15 vacationing Germans, and foreign direct investment. Much of this money went directly towards investment in the Spanish industrial sector, averaging at about 22% of Spanish GDP throughout the boom period.62 As a result of this high level of investment, Spain’s industrial output increased by an average of 11.13% annually between 1960 and 1973.63 This boom was mainly due to the Stabilization Pact of 1959, which encouraged the importation of capital goods. Because of German predominance in that sector, much of the capital equipment associated with Spain’s industrialization and rising industrial productivity was imported from Germany,64 further emphasizing the link between the Wirtschaftswunder and the Milagro Español. Conclusion Though these two economic “miracles” possessed very different attributes, they must be viewed together. Spanish guest workers provided labor to growing German industry and sent deutsche Marks home as remittances. Germans gradually gained wealth, and eventually decided to vacation in Spain, which in turn provided Spain further German currency. Spain then used this money to buy capital goods from Germany to grow its industry, and German firms began to invest in Spain. This cycle of economic development between Spain and Germany (as well as between Spain and the other Western European countries such as France) was extremely interrelated, and therefore cannot be properly understood outside of a broader European context. The German Wirtschaftswunder should be considered one of the important contributing factors that led to the Milagro Español. Without German tourists, Spanish Gastarbeiter, or German production of capital goods, the Spanish economy likely would not have been able to achieve the same level of growth. These developments are not limited to economics either. In many ways, German tourists in Spain provided an example of consumption that Spaniards would later try to emulate, while simultaneously providing the economic assistance needed to make that happen. The Spanish workforce changed dramatically as Spanish firms expanded with the assistance of German capital goods. Spaniards moved in substantial numbers from subsistence farming to industrial 62 Lieberman, Growth and Crisis in the Spanish Economy, 102. 63 Harrison, The Spanish Economy from the Civil War to the European Community, 41. 64 Giersch, The fading miracle: Four decades of market economy in Germany, 90.
  17. 17. McBride, 16 work or the service sector. As these massive structural shifts occurred, Spanish society began to increasingly resemble the rest of Western Europe, which in turn laid the groundwork for the 1975 Spanish transition to democracy under King Juan Carlos. Ironically, while the Führer of the German Reich assisted in establishing the Franquist regime in 1936, it was the German worker, through the Wirtschaftswunder and vacations on the Spanish beaches, who assisted in the Milagro Español and the subsequent 1975 Spanish transition to democracy.
  18. 18. McBride, 17 Bibliography Carr, Raymond. Modern Spain 1875-1980. New York: Oxford University Press, 1980. Galinsoga, Luis de. Centinela de Occidente (Semblanza biográfico de Francisco Franco). Barcelona: Editorial AHR, 1956. Giersch, Herbert, Karl-Heinz Paqué, and Holger Schmieding. The fading miracle: Four decades of market economy in Germany. Cambridge: Cambridge University Press, 1992. Grugel, Jean and Tim Rees. Franco’s Spain. New York: St. Martin’s Press, 1997. Harrison, Joseph. The Spanish Economy in the Twentieth Century. Beckenham: Croom Helm Ltd., 1985. Harrison, Joseph. The Spanish Economy: From the Civil War to the European Community. London: Macmillan Press Ltd., 1993. Hartrich, Edwin. The Fourth and Richest Reich. New York: Macmillan Press Ltd., 1980. Lieberman, Sima. Growth and Crisis in the Spanish Economy 1940-93. New York: Routledge, 1995. Muñoz, Teresa Garín. “German demand for tourism in Spain.” Tourism Management 28 (2007): 12. Payne, Stanley G. The Franco Regime 1936-1975. Madison: The University of Wisconsin Press, 1987. Preston, Paul. Franco: A Biography. New York: Harper Collins, 1994. Preston, Paul (ED). Spain in Crisis: The Evolution and Decline of the Franco Regime. New York: The Harvester Press Unlimited, 1976. Prollius, Michael von. Deutsche Wirtschaftsgeschichte nach 1945. Berlin: Vandenhoeck & Ruprecht, 2006. Wallich, Henry C. Mainsprings of the German Revival. New Haven: Yale University Press, 1955. Welles, Benjamin. Spain: The Gentle Anarchy. New York, Frederick A. Praeger, 1966.
  19. 19. McBride, 18 Appendix One Source: Angus Madison Dataset. Available at http://www.historicalstatistics.org/; accessed 10 December 2009 GrowthRateofGDPperCapita1944-1973(1990InternationalGeary-Khamisdollars) -60.00% -50.00% -40.00% -30.00% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00% 1945195019551960196519701975 Germany Spain
  20. 20. McBride, 19 Appendix Two Spanish GDP as a Percetage of West German GDP from 1944-1973 0 5 10 15 20 25 30 35 40 45 1944 1949 1954 1959 1964 1969 Source: Angus Madison Dataset. Available at http://www.historicalstatistics.org/; accessed 10 December 2009 Appendix Three Spain's income from Tourism (1955-73) 0 500 1000 1500 2000 2500 3000 3500 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 Year Earnings(MillionsUS$) Source: Lieberman, Growth and Crisis in the Spanish Economy 1940-93, 71. Harrison, The Spanish Economy in the Twentieth Century, 155.

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