There are many competing explanations for why West Germany has fared so well (Eichengreen 1996; Temin 2002; Eichengreen and Ritschl 2009; Vonyó 2008, 2018). One of them is that after the war it simply returned to its long-term growth trajectory (Jánossy, 1969). However, this neoclassical assumption of post-war reconstruction/catch-up cannot explain the divergence between Germany and other equally devastated Western European nations. Of course, other political and institutional factors must have played a role. A second common statement asserts that the war has created an opportunity to redistribute jobs from low-productivity sectors, such as agriculture, to high-productivity sectors such as manufacturing (Temin 2002). However, in Germany, the increase in labour productivity was due more to changes in the service sector than to manufacturing, with the former absorbing most of the relocation of agriculture after the Second World War (Broadberry, 1997). A third statement suggests that growth arose from the creation of new business partners in the late 1940s and 1950s (Sachs and Warner in 1995; Bordo, Eichengreen and Irwin 1999). In the 1950s, the degree of openness of the economy, which is reflected in the sum of exports and imports as a percentage of GDP, was actually lower in Germany (24.5%) than in the United Kingdom (43.2%), Austria (38.5%) and France (26.7%) (Penn World Tables 2015). Others point to the role of the end of the planning of the National Socialist state and the subsequent introduction of free reforms in a market economy after the interventions of the United States, the United Kingdom and France (De Long and Eichengreen, 1993); Eichengreen 1996).
In this article, we try to show how the 1953 debt relief program, known as the London Debt Agreement (LDA), could have indirectly contributed to growth by creating a favorable economic environment, directly stabilizing German public finances, and allowing for greater public investment. But what the LDA shows is that debt cancellation can help boost growth and lay the foundation for fairer fiscal outcomes. Indeed, creditors have recovered a significant portion of their money by reading the repayment of the debt rescheduled to Germany`s growth capacity. Debt restructuring proved to be a success, and while there had been a debt problem shortly before 1953, a decade later, there was none. Moreover, it is not the mere easing of German finances that requires our attention, but the philosophy of the agreement, namely «to contribute to the development of a prosperous international community» (The German External Debt Agreement of 1953, B3). One of the main economic advantages envisaged by the LDA was that it would free up fiscal space. This space could then be used for national investments and to meet additional social spending needs. If that were the case, social spending under the LDA should have increased fairly rapidly compared to other categories of expenditure. To determine the extent to which the ADB was associated with an increase in social spending per capita, we implemented differential regression models that explained changes over time in 14 types of actual spending per capita. Our sample ranged from 1948 to 1962, including the years before and after the ADA. The treatment group was social expenditure, which includes the categories of health, education, economic development and housing.
The control group contained the other 10 categories. We find that the LDA has been associated with a significant increase in per capita social spending in real terms in the areas of health, education, housing and economic development, which has been significantly greater than changes in other types of spending involving military spending and higher than in the years leading up to the LDA.1 We also considered this to be a model of «Fully flexible» difference difference, allowing separate coefficients for the social expenditure category for each year of the sample. This model also contained annual puppets and fixed effects for the 14 categories of expenditure (Figure 1). . . .