Foreign Capital Inflows and Economic Stagnation in Weimar Germany

In this chapter, Pittaluga and Seghezza take up the so-called “Borchardt debate” regarding the relatively low growth of the German economy in the second half of the 1920s. The authors show that Germany’s divergence from other advanced countries in the second half of the 1920s concerned, not so much the level of investment, as the comparative productivity of the investments made. According to Pittaluga and Seghezza, the low German productivity growth was due to the fact that the huge inflow of foreign capital following the Dawes Plan, while enabling the Weimar Germany to quell social conflict by maintaining high government spending and persistent foreign deficits, it also provoked a Dutch disease that made investment in non-tradable sectors more profitable than in tradable ones.