IS GERMANY DOING BADLY?

ANGLO-SAXON VERSUS SOCIAL MARKET CAPITALISM.
WHICH MODEL SHOULD BRITAIN ADOPT?

It has become fashionable in some circles to talk up the virtues of the Anglo-Saxon 'free market' version of capitalism and to denigrate the more socially oriented 'stakeholder' approaches to running a capitalist economy, such as are practiced in Northern European countries such as Germany, Sweden, Holland, Finland and Norway.
The prime proponents of this tendency are right wing economists and politicians, many financial journalists, employers' representative bodies and of course, the bulk of luminaries in the financial services industries. The tone of voice used is usually confidently assertive; the examples given are often based on comparisons between the performance of Germany and America. More recently, UK Chancellor Gordon Brown has taken to making rather triumphialist speeches about the favourable comparisons between Britain (flexible, competitive and enterprising) and Germany (outdated, failing, wedded to inflexible and inefficient labour markets).

The 'model' of capitalism chosen is of crucial importance for the future of the British economy. Currently, most of those in authority in Britain currently seem to favour the American model, which they portray as favouring free competition and unfettered market forces, with very few regulatory barriers to change and innovation. The fact that this is patently not true, as US governments and legislators have been unashamedly protectionist when it comes to supporting the interests of their industry and agriculture - and have used their dominance of the World Bank to further US trade - seems to escape British admirers. Also overlooked is the fact that the US is the most unequal society in the developed world, with a health system that was recently described in the New York Times as "The most privatised health system in the world" and "The most bloated and bureaucratic", generating very high infant mortality, low life expectancy and failing to cover the needs of 40 million Americans at all.

The very real and present danger is that we in Britain will play by all the rules of a free economy and lose (as is happening apace) most of our home-grown advanced industries to the US and others who play the open competition game with tongue in cheek.

This is a very interesting field for investigation. On the one hand, there appears to be some research that may indicate that some of the world's most successful societies; with strong economies, modern industries, excellent social health provision, good education, low crime and very little economic and social deprivation are represented by the (generally) Northern European social market countries.
Others would strenuously deny this, citing the sheer energy and growth of the US economy as evidence of the fact that unfettered market forces create the most dynamism and the social market model, with its high taxation and high levels of social services, acts as a contraceptive to economic flexibility and growth. They cite the tendency of social market economies to moderate rapid change and 'creative destruction' as evidence of scelerotic decline.

So what of the facts?

What are we to believe? This topic will run and run - but perhaps a good place to start is with Germany, where the post-war economic miracle has manifestly run out of steam. What are the facts, rather than the prejudices, about the German economy?
For starters, here are a few:

• The German Bundesrepublik, old Western Germany, took on the task of regenerating the former East Germany in the 1980's. East Germany had been a part of the Soviet bloc for over 40 years and its total infrastructure was in a state of decay bordering on collapse. Additionally, a whole generation had become used to being the passive members of an autocratic and hierarchical society. Helmut Kohl, who pushed through integration, totally underestimated the task of bringing East Germany up to Western standards, and West Germany has had a millstone round its neck for 20 years. To put this in context, it is the same as the UK economy having to absorb Scotland, Wales and Northern Ireland, or the US, Mexico, as ruined and derelict countries. The 'knockers' of the German social market model invariably seem to forget this highly significant fact.
• In recent years, German companies have striven to reduce costs and keep productivity moving ahead. They have done this by outsourcing and off-shoring manufacturing and basic services, particularly to the low cost economies of Eastern Europe. This meant 'leapfrogging' East Germany, where the populace were not tolerant towards accepting manifestly lower pay and social benefits than their Western counterparts.
  Thus the fact that many German companies, especially engineering and high-technology companies, are doing remarkably well and have superb export performances has not been of benefit to the German domestic economy, which has languished with high unemployment.
• Here are the changes in the share of world exports of a range of developed countries:

  Share of world exports - % change.
  Country	1999-2003
  Germany	plus 4.7
  UK	minus 14.2
  US	minus 20.9
  China	plus 69.8

  So, sclerotic old Germany seems to have been the only large developed country to have grown its share of world trade and its trade balance in the face of rampant competition from the emerging powerhouses of China and India.
• The German economy has a strong base in industries based on innovation, R&D and high technology. A large proportion of German companies are in advanced engineering, electronics, office equipment and computing, automotive engineering, telecoms engineering chemicals and computer software - as well as investment banking and financial services.
  This facet of the German economy contrasts strongly with Britain, where the decline of indigenous knowledge and high technology-based industry continues unabated. In this regard, Germany seems much better placed to face a competitive modern world than Britain.
• The German weaknesses seem to be an inability to generate more employment in relatively low-skill, lowish pay service activities and the lack of responsiveness to rapid changes in its environment. Thus domestic unemployment is much higher than the US or Britain. Against this must be placed the facts that much of the growth in employment in the U.S and U.K has been in part-time and relatively low-skill work. There has almost certainly been a marked decline in skilled relatively well paid employment in Britain, although this needs more investigation.
• But the biggest surprise of all is the fact that had it not been for a growth in American public sector employment of 1.1 million jobs since 2000, the US economy would not have registered any jobs growth in the period from that date to now. In fact, during the first Bush administration, the 'world's most dynamic economy' saw a massive decline in employment.

Choose your model.

So, the choice appears to be between flexible, market-driven economies that are shored up by a relatively high proportion of low-paid employment and stakeholder-based, more rigid models that are more resistant to rapid change change, but preserve and support industries that require consistent investment and preserve skilled, highly paid employment
The former models seem to be destined to suffer from permanent balance of payment and external account deficits, with the potential long-term instability that that generates - the latter seem to generate healthy external trade balances based on high-technology, high-added-value products and services.

Which do you prefer?

Some would say that it is essential to make a stark choice between the social market model and the Darwinian Anglo-Saxon alternative. We believe that this is a false choice. Collins and Porras, in their book, 'Built to Last' sensibly attack the Tyranny of the Or, praising the power of the And.
Our preference would be the best of both. There is no doubt that the German domestic economy would benefit immeasurably by the ability to dispose more easily of unnecessary and uneconomic jobs and to build a stock of lower paid part and full-time service roles.
Equally, allowing the financial markets to become a wrecking ball for good companies, and failing to offer support and protection to British enterprises where all other governments actively provide covert and overt protection for important industries is just a losers' game. Employees will have to be accorded more say in determining the futures of their enterprises, or else we will eventually experience a real crisis of commitment and loss of vital skills on a serious scale. This will mean putting some constraints on the currently sacrosanct rights of 'shareholders'; especially the more speculative ones, who can only be described as owners in the most narrow technical sense.
There does not seem to be conclusive evidence that low-tax, low regulation, very flexible market-driven economies foster better and more healthy societies for the greatest number of their citizens than those that seek to involve employees and the wider society in the determination of economic development.
And that is our definition of a 'good' economy.