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2.2.3. Germany

Germany is now commonly known as the home of infant industry protection, both intellectually and in terms of policies. However, historically speaking, tariff protection actually played a far less important role in the economic development of Germany than in that of the UK or the USA.

The tariff protection for industry in Prussia before the 1834 German customs union under its leadership (Zollverein) and that subsequently accorded to German industry in general remained mild. Trebilcock, an authority on German industrialization of the period, categorically states that ‘Zollverein tariffs were insufficient to provide effective “infant industry” protection; even the iron manufacturers went without tariff duties until 1844, and lacked successful protection well beyond this’ .[107] The Prussian state constantly resisted political pressures for higher tariffs by other member states of Zollverein. Although there were increases in tariffs in 1844 (on iron) and 1846 (on cotton yarn), these were relatively small. After that, the Zollverein tariff showed a general downward trend until the late 1870s, with a bilateral free trade agreement with France in 1862 and a reduction in steel duties in 1870.[108]

In 1879, however, Otto von Bismarck, the German Chancellor, introduced a great tariff increase to cement the political alliance between the Junkers (landlords) and the heavy industrialists – the so-called ‘marriage of iron and rye’ .[109] However, even after this, substantial additional protection was accorded only to agriculture and the key heavy industries, especially the iron & steel industry, and industrial protection in general remained low.[110] As can be seen from table 2.1, the level of protection in German manufacturing was one of the lowest among comparable countries throughout the nineteenth century and the first half of the twentieth century.

The relatively low tariff protection does not mean that the German state took a laissez-faire approach to economic development. Under Frederick William I (1713-40) and Frederick the Great (1740-86), the Prussian state, which eventually unified Germany, pursued a range of policies to promote new industries. The conventional measures such as tariff protection (which was not too significant on its own, as I have pointed out above), monopoly grants and cheap supplies from royal factories were of course used, but more important was the direct involvement of the state in key industries.[111]

When Frederick the Great came to power, Prussia was essentially a raw-material exporter, with woollen and linen clothes being the only manufactured export items. Continuing his father’s mercantilist policies, he promoted a large number of industries – especially textiles (linen above all), metals, armaments, porcelain, silk, and sugar refining – by providing, among other things, monopoly rights, trade protection, export subsidies, capital investments, and skilled workers from abroad.[112] Frederick also retained a number of business houses to function as (what would today be called) ‘management consultants’ in order to pioneer development of new industries, especially the cutlery, sugar-refining, metals and munitions industries. These ‘model factories’ were in many ways hothouse plants that would not have survived exposure to full market competition; however, they were important in introducing new technologies and generating ‘demonstration effects’.[113]

In his ambition to transform the country into a military power, Frederick also annexed the industrial province of Silesia and began to work on its development. In particular, he promoted the steel and linen industries, installing the first blast furnace in Germany in the province and recruiting skilled foreign weavers by giving them each a free loom. The development of Silesia as the ‘arsenal of Germany’ was further promoted after Frederick’s death by a number of dynamic bureaucrat-entrepreneurs.[114]

The most important of these was probably Graf von Reden, who successfully introduced advanced technologies from the more developed countries, especially Britain (from which he drew iron-puddling technology, the coke furnace and steam engine), by means of a combination of state-supported industrial espionage and the poaching of skilled workers during the late eighteenth and early nineteenth centuries. Another significant figure was Peter Beuth, who in 1816 became head of the department of trade and industry in the Ministry of Finance. Beuth set up the famous Gewerbeinstitut (Craft Institute) in 1820 to train skilled workers, subsidized foreign trips to gather information on new technologies, collected foreign machinery for copying (giving the original pieces to private sector firms), and provided support for business start-ups, especially in machinery, the steam engine and locomotive industries.[115]

By 1842, Silesia was considered technologically almost on a par with Britain, and was certainly the most developed region on the Continent. The success in Silesia was, as had been intended, confined to a narrow range of military-related industries and did not spill over into other regions easily. However, this is an important example of how in a catchup economy the state could compensate for the scarcity of entrepreneurial talent.[116]

From the early nineteenth century onward, the Prussian state also pioneered a less direct and more sophisticated form of interventionism than that used in Silesia. One important example is the government financing of road building in the Ruhr.[117] Another important example is educational reform, which involved not only building new schools and universities but also the reorientation of their teaching from theology to science and technology – this at a time when science and technology was not being taught in Oxford or Cambridge. The quality of German higher education at the time is proven by the fact that between 1820 and 1920 an estimated 9,000 Americans went to Germany to study.[118]

There were some growth-retarding effects of Prussian government intervention in the first half of the nineteenth century, such as the opposition to the development of banking.[119] However, on the whole, we cannot but agree with the statement by Milward & Saul that ‘[t]o successive industrialising countries the attitude taken by early nineteenth-century German governments seemed much more nearly in touch with economic realities than the rather idealised and frequently simplified model of what had happened in Britain or France which economists presented to them’ .[120]

After the 1840s, with the growth of the private sector, the involvement of the German state in industrial development became less pronounced. However, this did not mean a withdrawal of the state, but rather a transition from a directive to a guiding role – examples of policies of this time include scholarships to promising innovators, subsidies to competent entrepreneurs, and the organization of exhibitions of new machinery and industrial processes.[121]

During the Second Reich (1870—1914), further development of the private sector and the strengthening of the Junker element, which was opposed to further industrial development, in the bureaucracy, led to an erosion of state autonomy and capacity.[122] Trebilcock argues that, in terms of industrial development, the German state’s role during this period was largely confined to the administration of tariffs and, informally from the late 1890s and more formally from the 1920s, to cartel supervision (for further details on German cartels, see section 3.2.4.D. of Chapter 3).[123]