Tuesday, June 05, 2007

"Can Germany Be Saved?"

While Germany has seen an economic upswing in the last two years a lot of the proposed reforms have been toned down. Longtime readers of this blog will be familiar with Germany's demographic outlook but there a number of issues including social, labour, business, and market reform that still need to be resolved. One of the most prominent critics in Germany is Prof. Hans Werner Sinn, also president of the German Economic IFO institute. Back in 2004 Sinn wrote a book giving an historic overview of how Germany's wirtschaftwunder came to be and how Germany came into the positon it is now in, "Ist Deutschland noch zu retten?" Which, to the dismay of others, took a hard and critical look at Germany's economic problems and what solutions are possible. As they say: "die wahrheit tut weh".

Prof. Sinn has now published an updated english edition available from MIT Press: "Can Germany Be Saved?-The Malaise of the World's First Welfare State". This book is meant for Germany but a lot of the lessons apply to other countries as well. Germany will be the first country to face these challenges but not the last.

What has happened to the German economic miracle? Rebuilding from the rubble and ruin of two world wars, Germany in the second half of the twentieth century recaptured its economic strength. High-quality German-made products ranging from precision tools to automobiles again conquered world markets, and the country experienced stratospheric growth and virtually full employment. Germany (or West Germany, until 1989) returned to its position as the economic powerhouse of Europe and became the world's third-largest economy after the United States and Japan. But in recent years growth has slowed, unemployment has soared, and the economic unification of eastern and western Germany has been mishandled. Europe's largest economy is now outperformed by many of its European neighbors in per capita terms. In Can Germany Be Saved?, Hans-Werner Sinn, one of Germany's leading economists, takes a frank look at his country's economic problems and proposes welfare- and tax-reform measures aimed at returning Germany to its former vigor and vitality.

An introduction with sample chapters can be found at MIT Press.


Scott said...

What struck me as remarkable on reading this post is the success of democracy and capitalism in West Germany after WWII, given the failure of both during the Weimar Republic which led to Nazi control of Germany.

Colin Reid said...

From what I remember of covering it at school, Weimar was quite a saga, with about 4 stages: the revolution and revolutionary turmoil (Spartacists etc); hyperinflation and the French/Belgian occupation of the Ruhrgebiet; then Gustav Stresemann's 'Golden Era' 1923-29; finally, complete political and economic disintegration due to the Great Depression, extremist groups and complicity by the conservative establishment (the death of Stresemann just weeks before the Wall Street Crash was also very unfortunate timing). The second time round, the first phase was avoided by the presence of occupying powers; the second by more responsible monetary policy, and lack of reparations meant there couldn't be a reparations crisis; and there was no corresponding outside trigger for the fourth (indeed, West Germany's trading partners were also going from strength to strength). So post-WWII West Germany was able to move more or less straight to the 'prosperous democracy' phase and stay there, like 1923-29 but with more permanence.

Anonymous said...

It's astounding to me that Merkel is worried about the impacts of global warming in 50 or 100 years. Should this be the primary concern of a leader who's population is shrinking already and is set to shrink dramatically this century? Ditto for other European leaders.

Why are they not focused exclusively on pro-natalist policies now, before it is way too late. It makes absolutely now sense that they should be wasting their breath on global warming or other irrelevancies.

Edward Hugh said...

"It's astounding to me that Merkel is worried about the impacts of global warming in 50 or 100 years."

Well, while I do think the global warming phenomenon is important, I cannot but agree with you that it is perplexing why Angela Merkel is giving such emphasis to one longer term problem while not heading a global initiative to try to get to grips with the major problems which Germany is heading for in the much shorter term if nothing is done to address the issue of the global demographic imbalances.

On the Sinn book more generally, perhaps the part of his thesis which has attracted most critical comment is the idea of the bazaar economy.

Now, at the present time I am investigating a bit the German export growth phenomenon, and I came across this IMF working paper:

What Explains Germany’s Rebounding Export Market Share?
by Stephan Danninger and Fred Joutz

Now Claus and I are evidently interested in Germany's export performance in connection with our median age thesis (see the critique of this being made - eg - in the post just coming up next), and the authors of this paper do say the following on this:

The analysis shows that recent export growth can be traced back to the ability of German exporters to meet global demand and to exploit new production and cost cutting opportunities from offshoring activities. The estimated export models show a unitary export elasticity with respect to overall import demand of trading partners. In other words, Germany has been able to take advantage of the rapid growth of global markets as found for instance by Everaert and others (2005).

This is hardly news, but then there is this:

The analysis also provides empirical support for the claim that German exports increased as a result of a regional division of labor in the production of goods (Sinn 2006, Hummels and others 2001).

That is, they tested for the Bazaar thesis, and found some level of confirmation:

These two factors explain about 60 percent of the faster increase of German exports since 2000 vis a vis industrial countries.

OTOH, Sinn as I remember, doesn't examine the kinds of consumption related impacts and structural transformations of demand that Claus and I have gotten into, but beyond that the book is obviously an interesting first attempt to get to grips with something.

As anonymous laments, pity others weren't, and haven't been, listening.