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Overview
In this book, one of Germany's most influential economists describes his country's economy, the largest in the European Union and the third largest in the world, and analyzes its weaknesses: poor GDP growth performance, high unemployment due to a malfunctioning labor market, and an unsustainable social security system. Horst Siebert spells out the reforms necessary to overcome these shortcomings. Taking a broader view than other recent books on the German economy, he considers Germany's fiscal policy stance, product market regulation, capital market, environmental policy, aging and immigration policies, and its system for human capital formation as well as Germany's role in the European Union, including the euro zone.
Germany's system of economic governance emerges as a common theme as Siebert examines why this onetime economic powerhouse is today a faltering giant. He argues that what Germany needs, above all, is a market renaissance; that it must throw off the shackles of its social welfare economy and of its hallmark consensus approach, whereby group-based cooperative decision-making has undermined competition and markets. In doing so he examines both the country's social security system and its labor market, including trade unions. His focus throughout is on Germany's present concerns, foreseeable future problems, and long-term policy issues.
The definitive word on the postwar German economy to the present day, The German Economy is essential reading for economists and finance professionals as well as students, researchers, and others interested in modern-day Germany and its place and prospects at the heart of Europe.
Product Details
| ISBN-13: | 9781400851652 |
|---|---|
| Publisher: | Princeton University Press |
| Publication date: | 04/24/2014 |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 416 |
| File size: | 6 MB |
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Read an Excerpt
The German Economy
Beyond the Social MarketChapter One
BASIC FEATURES OF THE GERMAN ECONOMYGermany is an open economy with a strong industrial base, producing about a third of its gross domestic product for export. It is also an economy in which social protection and the state play dominant roles. These two characteristics establish the central theme that will be encountered throughout this book.
Because of its openness, Germany is influenced both by the intense competition on the world product markets and by the competition among locations for the internationally mobile capital and technology that abound on the world's factor markets. Economic decisions in Germany are therefore subject to the country's need to compete in the world economy. This has been a fundamental economic law for Germany since the end of World War II. Openness means that, by and large, free markets for products prevail. The exceptions are regulations in specific areas and subsidies to sectors like coal mining and agriculture.
In contrast to this openness to competition, however, protection exists in many areas of the German economy, especially protection of the individual-e.g., through social security for unemployment, health care, nursing care, old-age pensions and by social welfare. About athird of GDP is allocated to the "social budget." Those in employment are also protected, with respect to both their jobs and their wage incomes, as negotiated by the social partners, the trade unions and the employers' associations. Germany's labor market is heavily regulated. The social partners have a strong position arising from legal stipulations; they have been granted the right to define norms and set the nominal wage rate. In addition, people are protected against the implications of competition by the institutional forms of governance in the German system. Reliance is placed on a non-market type of decision-making, as in the management of firms through codetermination by the employees' and union representatives in the supervisory boards of directors and in the workers' councils, the allocation of capital through a bank-based system with intermediated products, and the formation of human capital, especially in universities, via a governmental administrative planning approach. Codetermination restrains the influence of market forces in firms; mediated products are a substitute for market products in the capital market, and human capital formation is government dominated.
The government has a strong impact on the German economy in other areas as well: half of GDP (including social security) passes through it. In all of these domains, consensus plays a central role in the system of governance. The government itself is organized as a federal state, with tax revenue shared between the federal states (distributive federalism) and with two parliamentary chambers, one of which-the Bundesrat-represents the federal states (Länder). Many laws require the concurrence of both chambers, so that here too consensus is required.
The Historic Road to Prosperity
With a population of 82 million inhabitants and a GDP of F2.1 billion, Germany is Europe's largest economy, producing nearly a quarter of the European Union's GDP and nearly a third of the GDP of the euro currency area (data for 2002). It is the third largest economy in the world, accounting for 6 percent of world GDP (2000)-one fifth the magnitude of the US share and less than half that of Japan. Accounting for 9.5 percent of world exports, Germany comes second in world trade after the United States.
GDP per capita is F26 000 in current values (2002), slightly above the EU-15 average (104 percent at current prices) and at about the same level as France, Italy, and the United Kingdom, but somewhat lower than some of the smaller EU members, e.g., Austria, Denmark, the Netherlands, and Ireland. GDP per capita at current prices and at the current exchange rate is about the same as that of Japan, but lower than that of other countries, e.g., the United States (at 142 percent of the EU level), Switzerland, and Norway. According to calculations of the World Bank, Germany's relative ranking in GDP per capita in current prices stands at position 20, and in purchasing power parity at 21. Without question, Germany belongs to the rich industrialized countries of the world-in other words, the high-income countries.
Germany has experienced an admirable increase in prosperity. Its per capita GDP of about F4350 in 1950 rose by a factor of nearly six to F24 057 in 2002 in constant prices. GDP growth rates were high in the first three decades after World War II, at 8.2 percent in the 1950s, 4.4 percent in the 1960s, and 2.8 percent in the 1970s. It also enjoyed a high growth rate in labor productivity per hour, with rates of 5.3 percent in the 1960s and 3.7 percent in the 1970s (table 1.1).
The first three decades after World War II were devoted to the process of catching up with the United States. The country's institutional setup was beneficial for growth. In 1948 Ludwig Erhard freed prices, which ended the rationing of the product markets. Quickly, the economy was opened up to international competition. Nationalization of basic industries, especially coal and steel, was not pursued, although this had been considered, temporarily, even by the Christian Democrats. Establishing the Deutschmark as a stable currency made possible convertibility, first for foreigners and then for residents. Germans, hard-working and success-oriented, saw their dreams coming true-the first vacation abroad, the first motorcycle, their own home. In a way, in these years of the Wirtschaftswunder Germans experienced positive surprises, in that the economic system generated a higher income and a larger bundle of consumption goods than people had hoped for. Even wages increased by more in real terms than the social partners had negotiated; there was a positive wage drift through the market forces. This was a period of positive surprise. In such a period, today's success is the fuel for greater effort tomorrow.
A Lower Growth Path since 1980
The two oil crises in 1973/74 and 1979/80, though causing a serious shock to the German economy with the two ensuing recessions, did not seem to have changed the pattern of growth, at first; three million additional jobs were generated in the 1980s, and many economic indicators improved in the second part of that decade. Nevertheless the year 1980, with the second oil shock, and the following recession in 1982 can be viewed as a turning point of Germany's economic development. The increase in GDP per capita became smaller, falling to 2.0 percent in the 1980s, and the economy moved to a lower potential growth path of around 2.5 percent. Labor productivity was growing at a similarly low rate after 1980, by which time productivity growth had halved relative to the 1960s and was substantially lower than in the 1970s. The economic system had changed its economic properties without the politicians and the public really noticing.
Looking at economic growth for the united Germany from 1991 (the first year for which we have GDP data for the reunified country) onward, the annual growth rate for the period 1991-2000 was only 1.3 percent. This figure is somewhat distorted, since the high growth rates of 1990 (in West Germany) and of 1991 (in reunified Germany) are not included. If one were to take the 1990 West German GDP as the base value, the annual GDP growth rate for the period 1990-2000 would amount to 3.0 percent. However in this procedure, unification or the addition of East Germany to the German economy would be interpreted as growth. This rate would be way too high. If we include the West German growth rate of 1991 (5.1 percent), the growth rate for the period 1990-2000 would amount to 2.0 percent instead of 1.3 for the period 1991-2000. For 1995-2002 these statistical problems are no longer relevant; moreover, the deep recession of 1992 does not affect these data; for this period Germany's GDP growth rate was only 1.2 percent.
Over a longer duration of five decades, the high rates of about 8 percent or more in the years between 1951-56, 1959, and 1960 could no longer be reached. Since 1980, rates over 4 percent were registered only in 1990 and 1991, the years of the German unification boom (figure 1.1). The GDP growth rate continued its decline. Even if a recovery in 2004 and 2005 changes the bleak picture somewhat, there is a clear secular trend of a steadily decreasing growth rate.
An Open Economy
A widely accepted principle of German economic strategy has been the openness of its economy, that is, its free trade policy. In spite of the subsidization of some sectors such as coal mining and agriculture, protectionism was never attractive in post-war Germany. Having joined the GATT in 1951, and with current trade policy being implemented at the European level, the principle of an open economy is by now well entrenched.
Germany has an export share of 35.5 percent of its GDP (2002). The overwhelming part of its exports-42 percent-go into the euro area and 55 percent are sold to the 15 EU countries (not all EU countries are part of the euro area); if the ten new member states of European Union enlargement are included, this share would be 64 percent. About 10 percent of exports are bought by the United States, another 10 percent by other industrialized countries, and still another 10 percent by the countries of central and eastern Europe (including the new EU members). Smaller portions are shipped to South East Asia (5 percent) and Latin America (2.5 percent) (2001).
The share of West German exports in its GDP increased steadily from the end of World War II, from 13.7 percent in 1950 to 18.0 percent in 1951, 19.0 percent in 1960, 21.2 percent in 1970, 26.4 percent in 1980, and 32.1 in 1990 (figure 1.2). It then fell for the united Germany to 22.8 percent in 1993 before rising again beyond its 1990 level. Clearly, Germany has successfully integrated itself into the international division of labor. Free trade has been the vehicle by which it has managed to increase its well-being.
Germany's technology-based industry provides almost 90 percent of the country's exports, of which a large part is investment goods: 59 percent of exports stem from four industrial sectors-machine building, automobile, chemicals, and electro-technical products; only 10 percent of exports are services.
Germany has hardly any natural resources except for coal, wood, and a few minerals. Its industrial base traditionally depended on the engineering ideas and innovative performance, on entrepreneurial spirit, on the organizational capabilities of its people, and on the skills and the effort of its workers. Raw materials and energy had to, and still have to, be imported; energy accounts for 5 percent of total imports. Foodstuffs make up 11 percent of all imports, 9 percent are intermediate products. The bulk of imports are consumer goods and investment goods. This holds especially for trade within the same sector (intra-industry or intra-sectoral trade), where many products, from cars to investment goods, are similar and thus represent both export goods and import goods. The coefficient of intra-industry trade at the two-digit level is at 0.74, higher than in for the United States (0.68) and Japan (0.45) (data for 2000).
The current account was slightly negative in the 1990s, but the balance has been in a surplus since 2001. A larger surplus, amounting to over 4 percent of GDP, was reached in the late 1980s when Germany was a net capital exporter like Japan. As a result of German unification, there was a swing in the external position, from a positive 4.6 percent of GDP in 1989 to a negative 1.2 percent in 1991.
The contribution of trade to growth can be interpreted from both the demand side and the supply side. In the short run, and viewed from the demand side, the contribution of trade stems from net exports, i.e., from a surplus in the trade balance. Positive net exports have a positive impact, as exports stimulate aggregate demand and offset imports, which represent a leakage in the traditional Keynesian analysis. From this point of view, a positive trade balance represents a positive contribution to the growth rate, its contribution being measured by the Lundberg component. A negative trade balance reduces the growth rate, and a balanced trade account has no demand effect on growth. Traditionally, in the German case an upswing in the business cycle is stimulated by an increase in export demand, which is then followed by a pick-up of investment and eventually leads to less uncertainty, in terms of employment, and to higher income, so that consumer demand increases as well. In the long run, and viewed from the supply side, trade has an impact on growth through different channels. Imports increase the set of available consumption goods; they also enlarge the production capacity of the economy by making intermediate inputs, investment goods and new technology available to the firms. Trade allows specialization gains and enhances the accumulation of growth factors.
The Enterprise Sector
Looking at the production side of the German economy, 22.2 percent of total gross value added came from industry in 2002, a further 6.8 percent from the other producing sectors, and 1.1 percent from agriculture. The bulk of gross value added, 70.1 percent, was generated in the service sector. Within the service sector, 30.4 percent came from financing, housing, and services to firms, 18.0 percent from retail, trading, hotels, and restaurants and 6.1 percent from public sector services.
Of the German firms, the larger German multinationals such as Allianz, Bayer, BMW, DaimlerChrysler, Siemens, and Volkswagen are recognized internationally. Out of the 20 largest firms as measured by their employees, 8 are in the export-oriented German industry, 3 of which are car producers (table 1.2); 4 are in the service sector; and another 4 in retail and trading. A few of these, like Lufthansa, are multinationals, but most are oriented toward the home market. Together with the two large energy suppliers on this list of the 20 largest German firms, the non-tradable sector is strongly represented.
It is important to make a clear distinction between the performance of the German firms and the status of the German economy. The German multinationals generate a large part of their value added abroad; this production is not included in the German GDP, whereas production by foreign firms in Germany does count towards the German GDP. Likewise, employment by German firms is not identical to employment in Germany. Whereas German firms are efficient according to international standards, this does not imply that targets of economic policy such as full employment are met in Germany.
It would be misleading to attempt to understand Germany's enterprise sector by looking solely at these 20 large firms. Among the larger firms are other international players, such as Bertelsmann with 81 000 employees, Deutsche Bank with 77 000 employees, and MAN with 75 000 employees. The ranks of firms smaller in size are densely populated with, for instance, Boehringer Ingelheim at position 25 of the industrial firms in terms of revenue (32 000 employees), Freudenberg, a family-dominated enterprise (28 000 employees) at position 49, Braun (29 000) at rank 66, Miele (15 000) at position 80, and Brose Fahrzeugbau (7000), a firm producing car seats and car doors, at ranking 100.
Analyzing the structure of firms in more detail, and looking at it from the revenue side, 2.6 million out of 2.9 million enterprises, or 89.4 percent, have an annual revenue of less than F1 million (data for 2000); 300 000 enterprises, or 10.3 percent, have an annual revenue of between 1 million and 50 million euro; 7700 companies, or 0.3 percent, have a revenue of more than 50 million euro. From the point of view of employment, there are 2.15 million businesses paying social security contributions for their employees (table 1.3). Of these, 18.2 percent are businesses with fewer than 10 employees, 60.2 percent businesses employing between 10 and 499 people, and 21.6 percent businesses employing 500 or more.
(Continues...)
Excerpted from The German Economy by Horst Siebert Copyright © 2005 by Princeton University Press . Excerpted by permission.
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Table of Contents
Preface viiChapter One: Basic Features of the German Economy 1
Chapter Two: The Social Market Economy 24
Chapter Three: The Weak Growth Performance 38
Chapter Four: The Labor Market: High and Sticky Unemployment 69
Chapter Five: The Social Security System under Strain 114
Chapter Six: Ageing as a Challenge over the Next Forty Years 154
Chapter Seven: Germany: an Immigration Country 166
Chapter Eight: Regulation of Product Markets 181
Chapter Nine: Environmental Protection: a German Topic 203
Chapter Ten: The Capital Market and Corporate Governance 213
Chapter Eleven: Human Capital and Technology Policy 244
Chapter Twelve: The Fiscal Policy Stance 261
Chapter Thirteen: Germany in the European Union: Economic Policy under Ceded
Sovereignty 292
Chapter Fourteen: The System of Governance in Germany’s Social Market Economy 325
Chapter Fifteen: The Need for a Renaissance of the Market Economy 365
References 378
Index 393
What People are Saying About This
This book will become the source that economists and other scholars will turn to for understanding one of the most influential and important economies in the world. Not only does it describe the German economy and its institutional features, but it also offers analysis and linkages between the institutional framework, policy, and economic performance.
— David Audretsch, Director of the Institute for Development Strategies, Indiana University, author of "Innovation and Industry Evolution"
This important book represents an ambitious and welcome attempt to analyse the past forty to fifty years of the German economy, which is vital not only for Europe but also for the world. Horst Siebert is certainly the perfect author for such a volume, and his argument is quite persuasive.
— Andre Sapir, Universite Libre de Bruxelles and Economic Advisor, Group of Policy Advisors to the President of the European Commission
"This book will become the source that economists and other scholars will turn to for understanding one of the most influential and important economies in the world. Not only does it describe the German economy and its institutional features, but it also offers analysis and linkages between the institutional framework, policy, and economic performance."—David Audretsch, Director of the Institute for Development Strategies, Indiana University, author of Innovation and Industry Evolution"This book's case that resumption of significant growth in Germany depends on removing rigidities in its labor market and social security system is convincingly argued and exceptionally well documented—and it is argued by a German, not by the IMF. Horst Siebert paints the German economy on a large canvas; his analysis stretches well beyond the labor market. Where appropriate, a great deal of detail is offered, in a digestible way."—Michael Artis, European University Institute, Florence, editor of The Economics of the European Union"This important book represents an ambitious and welcome attempt to analyse the past forty to fifty years of the German economy, which is vital not only for Europe but also for the world. Horst Siebert is certainly the perfect author for such a volume, and his argument is quite persuasive."—André Sapir, Université Libre de Bruxelles and Economic Advisor, Group of Policy Advisors to the President of the European Commission
This book's case that resumption of significant growth in Germany depends on removing rigidities in its labor market and social security system is convincingly argued and exceptionally well documented—and it is argued by a German, not by the IMF. Horst Siebert paints the German economy on a large canvas; his analysis stretches well beyond the labor market. Where appropriate, a great deal of detail is offered, in a digestible way.
— Michael Artis, European University Institute, Florence, editor of "The Economics of the European Union"