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Lessons learned by post-WWII Germany valuable for Arab world

Freedom and order for more justice:
Social Market economy - a model for the Arab world?

This is the second in a series of commentaries The Daily Star is publishing in association with the Konrad Adenauer Stiftung, a German research foundation.

West Germany developed the social market economy (also: managed capitalism) as its political-economic model after World War II. In its heart is the harmonization of economic freedoms with social justice. The fact that the social market economy has a social consciousness was the result of three factors.

First, it was necessary to overcome the hardship that Germans experienced on the ground. Second, it was necessary to spread confidence in the new political-economic system. Third, it reflected the paradigm shift in economics that set in with the Great Depression when economists began to advocate stronger states and to question the universal blessings of markets. Germany's social market economy is often described as a third way between capitalism and socialism. As it defines a social and economic order, it is far more complex than a macroeconomic policy framework. The commitment to a normative social and economic order had not only helped Germany realizing its economic miracle after World War II, it is also a viable option for the Arab world. Why?

The Arab world suffers from three problems that Germany was fortunate to avoid by subscribing to a social market economy: Lack of private sector competition, inward-orientation, and unequal economic opportunities.

In Germany, competition has led to rising incomes, widening tax bases, and economic modernization. Outward orientation has additionally led to peaceful relationships with its European neighbors. Equal economic opportunities and income redistribution have furthermore strengthened social cohesion, dismantled regional income imbalances, and promoted vertical mobility within the society. The spirit of the social market economy is also tangible in the European Union. The Arab world, on the other hand, embarked on a socialist flavored inward-orientation strategy that led to the bureaucratization of economic activity, capital flight, the melting of the private sector middle class, political authoritarianism, and nepotism.

Of course, making the right political decisions was extremely difficult after World War II. Similar to Germany, the Arab world was caught in the battle of ideologies. The combination of a colonial past with the evolution of the Cold War and the initial economic and technological success of the former Soviet Union had made inward-orientation and socialism a serious alternative. Moreover, many developing countries raised concerns about the opening of their economies to global competition, fearing that without protection they never would be able to catch up to the industrialized world. It turned out that they were wrong. The most successful developing countries were those that embarked on an outward-orientation strategy.

This apology in favour of early Arab leaders after World War II notwithstanding, most Arab countries are today in need of a new political-economic paradigm. The social market economy is a serious alternative in this regard, especially as opposed to its main competitor, the so-called washington consensus.

The main difference between the social market economy and the washington consensus lays not so much in the choice of successful policy and development instruments rather than the assessment of their interaction with social development goals. Both camps agree that competition, private property rights, price liberalization, control of inflation and fiscal austerity are main forces behind successful economic development. Specifically, they agree that these are favorable policies to allocate a country's scarce resources more efficiently and to free economic growth. Yet, there is substantial disagreement with regards to whether these benefits also promote social stability and cohesion. Social market economists question that this is the case and therefore additionally demand for taking into account the social order under which economic reforms and policies take place.

The compatibility of social order and economic reforms is so essential to the social market economy that there is even a unique German policy term for it, the so-called "Ordnungspolitik", which is best translated as order policy (regulatory or managed policy). The goal of order policy is to promote both market competition and balanced social development. In doing so, the state will step in with corrective actions only such that they minimize market distortions. This means, for example, that instead of giving subsidies to declining industries, the state will help laid off workers to acquire new skills. Moreover, the state is a last resort and demands individual self-responsibility first. Nevertheless, order policy in practice is responsive when economies slide into a recession and pro-active in empowering citizens when they are deprived of access to economic opportunities. It also anticipates market failures in the areas of education, social security, public infrastructure, and the environment.

It is eventually the awareness of the relationship between social and economic orders that cause social market economists to be critical of the washington consensus. From their perspective, the available experiences with the washington consensus suggest that economic and political reforms have been rushed into countries under the illusion that they would also bring about social development when in fact a complementary social stabilization concept should have been in place as well. Economic and political reforms in Latin America and the Arab world may have improved allocation efficiency but failed to dismantle existing economic inequalities of income and economic opportunities. Even worse, in the former Soviet Union once low levels of inequality have been lifted to Latin American and Arab standards. Accordingly, the fact that the benefits of economic reforms have left out the poorest of the society accounts substantially for current political instabilities in terms of a resurgence of left-wing populisms in Latin America, Islamic fundamentalism in the Arab world, and nationalism in Russia.

The only real world experience with the transformation of a society in the spirit of the social market economy has been the German unification. Germany has often been criticized for its handling of the unification, especially from the washington consensus camp. This critique was generally that West Germany's transfers to the East were too generous and the East's exposure to competition too little. Indeed, Germany has paid a high price for its reunification for many years and different aspects of the unification could have been handled differently, but Germany never drifted into social chaos. Germany's current generation made a sacrifice into equal economic opportunities for all Germans, whose fruits will be reaped by future generations. The washington consensus, on the other hand, fell to the illusion that getting the prices right alone would also get societies right. No, it also requires investments into the social order. Learning from Germany and Europe may thus be a serious alternative for the Arab world.

Marcus Marktanner is an Assistant Professor in the Department of Economics at the American University of Beirut (AUB). He received his Ph.D. from the Technical University of Ilmenau, Germany. In his doctoral thesis he examined the political economy of the transformation and integration process of formerly socialist economies. Before joining the faculty of AUB, he held teaching and research positions in Germany and the USA. His research interests include political economy, public policy analysis, transitional and development economics. He has also been regularly involved in public policy consultancy.

Marseille,11 19 2007
The Daily Star
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