The Krupp Steel Works was the largest company in Germany. This picture shows the scale of steel production in Germany by 1910.

In light of the current European crisis, there has been a lot of coverage on Greece. However, it would be interesting to shift the focus to Germany, because despite many European countries having a difficult time, Germany is doing very well. Germany is Greece’s largest creditor, and has a dominant position in Europe. Now that Greece cannot pay Germany back, Greece is revisiting history and saying that German did not pay off its war loans after World War Two. In addition to the complex European situation, it is incredible how Germany joined as a latecomer in the global economy, go through two world wars, but then rebound as one of the world’s wealthiest countries today.

To understand Germany’s economy, it is necessary to trace back to the history of Germany’s economic development. Germany’s economy did not really start to develop until the unification of Germany in 1871. Frieden mentions that the theory of economic backwardness helped Germany’s economy grow rapidly. In other words, Germany was ready to adapt to the newest and most modern technology, which allowed Germany to develop faster. While that was true, other patterns of development such as labor and migration, specialization, and policies had also contributed to Germany’s growth.

There were two phases of industrialization. The first industrialization focused on infrastructure, railway, mechanical engineering, and heavy industries such as iron and steel. The second industrialization emphasized on electricity and chemical products. Even though Germany was the country of technology and machinery, it is important to note that Germany started out modestly by producing simple products like toys and then progressed to produce machines.

Compared to the other parts of the world, there was not much trade protection in Germany, but the government was involved in the iron and steel industry. The dominant firms in the iron and steel industry created cartels to keep prices high and the German government restricted imports of iron and steel.  Coal and Steel industries had also incorporated horizontal integration to allow their businesses grow faster. Germany grew to become one of the top three exporters in Europe before the First World War, but unfortunately everything collapsed after the war.