by Adam S. Posen, Peterson Institute for International Economics
Op-ed in Die Welt
February 8, 2007
© Die Welt
If there is a strategic choice for advanced economies in today’s globalized world, it is, does one want to compete on price or on quality? In other words, does the economy specialize in high value-added products and industries, where wages are high as are technological requirements, or does the economy concentrate on high-volume commodified products and industries, where cost savings (including on wages) are the key to success? The enormous and sustained increase of the global labor supply accompanying the integration of China, India, and the former communist bloc into the world economy only increases the starkness of this choice by putting more price pressure on the low end, but it does not fundamentally alter it.
No example better illustrates the costs to an economy of distraction by export competitiveness than Germany in recent years. The German corporate sector desperately needs competitive pressure on it and reform of its corporate governance, but it escapes those changes by insisting that its large quantities of exports mean the fault lies elsewhere in the economy, like high taxes or wages. In fact, the very parts of the German economy that are most protected by overregulation, publicly subsidized financing, and unaccountable corporate governance (albeit not many tariff barriers per se) use the export success of some of its firms to justify its protections. Yet for all their exports, the resulting lack of consolidation or technical change in these sectors drives down productivity growth and returns to capital throughout the German economy. The large and truly efficient German multinationals increasingly move their production abroad, and the service sector stagnates.
Consequently, Germany’s successful export industries remain largely the same ones as they were 40 years ago (bulk chemicals and dyes, large electrical goods and appliances, machine tools, autos and auto parts), while global technological progress and competition from emerging markets means that these sectors have moved down the value chain. The dysfunctions of the German corporate sector also mean that there are almost no German firms—and thus few German workers and investors—that have emerged in what are today’s growing high-technology and service sectors; one German company (SAP) is among the top 25 software and IT services providers worldwide, and no German companies are among the top 25 IT hardware producers.
Such a focus on the currently exporting companies and the preservation of their current ownership structures also shows up in unexploited scale economies for German companies. If these companies grew, they would require greater external finance and thus loss of managerial freedom from accountability. Despite the common assumption that German multinationals are dominant in both Germany and in the European Union, Germany actually has 25 percent fewer large companies in Europe than is consistent with its share of the EU economy. By focusing on export success rather than productivity, Germany has brought about arrested development in its corporate sector.
Recent studies make clear that the current export boom is mostly due to growth in Germany’s export markets, not to improvements in price competitiveness. More important, this export-led growth has been insufficient to induce a significant increase in long pent-up German corporate investment. And now that the export cycle is peaking along with foreign growth and the euro, Germany has little to show for its relative wage deflation: GDP growth is universally forecast to be lower in 2007 than in 2006—thus having peaked at the far from blistering pace of 2.6 percent real year-over-year growth—and wage declines have substituted for innovation, entry into new sectors, or reform in the corporate sector.
Foremost, export promotion usually leads either to depreciating a country’s nominal exchange rate, thus eroding the purchasing power and the accumulated wealth of the citizenry, or depressing wages in export sectors to drive down the real exchange rate, either directly or through relative deflation vis-à-vis trading partners, thus cutting real incomes and domestic demand—as seen in Germany today. Real wage compression in Germany has proved a no more sustainable path to growth today than were the nominal devaluations pursued by the United Kingdom and Italy intermittently from the 1970s to the mid-1990s. In fact, in every decade and country, a focus on export competitiveness distracts policymakers and the public from a more beneficial emphasis on improving productivity. The result, as seen in Germany, is policy choices that tend to erode living standards.
Second, as seen in Germany, having exports as a policy goal leads easily to policies subsidizing or protecting exporting companies (mostly through domestic regulation rather than tariffs), thus distorting investment decisions and locking in old technologies and businesses at the expense of new entrants. German government resistance to the EU Takeover and Services Directives is in part due to the rhetorical success of entrenched managers and directors of German companies rallying support for what would keep exporters in German hands and thus their products in the national export totals—and thus foils either shareholders holding those managers and insiders accountable or gains from economies of scale due to cross-border mergers.
A number of Germany’s neighbors—Ireland, Denmark, the United Kingdom, Spain, and the Netherlands—have all has grown strongly since the early 1990s by generally encouraging real appreciation, foreign competition for and investment in their native corporate sectors, increasing openness to imports, and private investment in R&D (rather than picking specific technologies or national champions). All of this was only possible with a healthy disregard of export performance, and these countries enjoyed sustained improvements in growth rates. Note that it is these governments’ common commitments to pursuit of openness rather than of exports, and to putting competitive pressure on domestic corporations rather than to implementing so-called competitiveness policies, which these nations share and Germany does not. It is not some American absence of welfare-state generosity that is the common thread among these successful economies. It should be clear to German policymakers why the Exportweltmeisterschaft should be replaced as the goal of foreign economic policy with productivity and wage growth.