Tobias Kaphegyi

The competitiveness discussion of the nineties  

1. The beginning of the debate in the nineties

After a little competitiveness debate at the end of the eighties which came to its end because of the slowly increasing problems of the economy of Japan, but mostly because of the economic affiliation of the new federal states to the Federal Republik of Germany, the problems of reuniification were dominating the discussions in the economic policy for three or four years. The costs of Germany's reunification were placed in the foreground. The problems were: the increasing unemployment rate in the early 90s, the also increasing debt by the state and the dismantling of the social welfare state. The growth of new national economys in eastern Europe and the forced integration of Germany in the European market started a debate about the impacts of globalization. Forced by the fast economic growth of the "little tigers" in Southeast-Asia, a new copetitiveness debate has started. The public discussion reached its peak in the years 96 and 97. Reduced tradebarriers, a liberalized capital market and the permissiveness of employers and workers to establish firms and work legally all over Europe were new challenges.
 

2. The spectrum of the debate in the nineties

I will represent in this paper the breadth of argues in this debate with a diagramm. It is the best possibility to show a debate of such great complexity. I can’t describe every position in this debate, but it will be no problem for you to find a place for some missing positions in this diagramm. There will be enough room to recognize more differences and to differ the argumentation more exactly. After this I want to discribe some main positions in this debate.

2.1. The axis for the need of action

The x-axis of the spectrum of the competitiveness debate illustrate the arguements between "loss-theorists" and "normal-condition-theorists". The first group proposes an enormous need for action to secure employment or prosperity. Otherwise there can be a group also sees a need of defending democracy against the "terror of economy". "Normal-condition-theorists" see no extraordinary crisis of the economy. Where the "loss-theorist", for example, is recognizing indicators for a crisis of competitiveness, the "normal-condition-theorist" only sees a normal economic process.

2.2. The axis for economic theory

The y-axis describes the base of each contribution in the dicussion. Is it more under the obligation to supply or demand?

 
2.3. The diagram  

3. Two Positions in the Competitiveness discussion

I will describe now more exactly some positions in this debate. Those positions can be put in the diagram as seen above. (If you don’t agree with the position of the following standpoints, please let me know it in the news group.)

3.1. Competitiveness debate: "In competition of location".

The position of the German "Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung" from 1995:

( The "Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung" is a advisory body of the government dealing with the economic situation in Germany.)

A lot has happend in Germany over the years: The unemployment-rate is still high and direct investments is too small in Germany. There are not enough new capacities of production built in Germany. Firms are outsourcing more and more. The competitiveness is intensifying: tradebarriers fall down, the capital can move more freely, employers and workers can move freely in Europe, technology makes research possible on a world-wide base. The globalization of buisness networks increases and economies in the Third World and in eastern Europe get more and more efficient.

3.1.1. What has been wrong so far? (the Sachverständigenrat's argumentation)

So far, the overall opinion in Germany has been on saving or raising the income of the employees. On the other side, the state has always been focusing on a social policy without looking on the economy's efficiency. The question, therfore, is: Is Germany still able to finance the social-welfare-state?
Social policy today only happens to defend ownerships, the Rat argues. The people have not learned any economic basics, yet. The market in Germany is not healthy anymore. The state does intervene too much. Also, most of the German citizens are critical of modern technology, the Rat argues. That is the reason for why firms are going abroad.

3.1.2. What has to be done in the Rat's oppinion?

In budget policy: The state has to consolidate his budget and decrease its activities, at the same time. Germany has to force the state to save money by downsizing his tax revenues, the Rat says.

The state has to reduces taxes for businesses. The reliefs should be financed by saving 30 to 40 billion Marks.
The taxsystem also needs a change: it should be made easier. And, in the long run, the federal system should be changed. "It is a pity that chances of changing the financial constitution has been given up", the Rat argues. And also, subventions for businesses in the eastern part have to be bound after one or two years. Subventions for coalminers should be stopped.

In wage policy: The benefits by the social welfare state should be reduced. We have to produce more space for the real net profit. The costs of social insurances are much too high. There is not enough flexibility in the collective wage agreements because federal social insurances are rapidly increasing. We have to build a social system which is based on more selfresponse. There are some more ideas of fixing more flexibility in the collective wage agreements:

The contracts between associations of employers and trade unions should be more open so they can be adapted to crisis. Regional wage agreements schouldn’t be fixed to wage levels and the kind of work. The working time should be more flexible. There shouldn’t be any laws like the "Entsendegesetz" -- foreign workers are supposed to get the same salary as German workers -- when the state regulates directly the market.

In financial policy: Further, there should be a policy focusing on the quantity of money. It should be antiinflationary.

In International monetary policy: Echange rates shouldn't be fixed to each other because "wrong" national economic policies would be supported. Financial policy should focuse on the stabelization of prices and should support national fiscal and wage policy. There shouldn't be any taxes on speculation since they can't prevent future currency crises, the Rat says. National policies focusing on the stability of the international system is more efficient. The states should make public their economic situation to get an early-warning system.

3.2. Competitiveness debate: The position of Oskar Lafontaine and Christa Müller:

The Competitiveness debate is a very one-sided discussion, the two authors say. In most cases, the discussion is reduced to the following scheme: There is globalization. Globalization is producing more competition because trade barriers are falling. Now, German businesses are facing problems because of the following facts: costs of work are too high, workingtime is too short, taxes are too high and the social system is too expensive. Therefore, Germany isn not a good location for buisness.

3.2.1. Let’s face some facts:

The trade balance: (the relation between import and export) raised constantly from 1982 until 1990/91. Germay's reunification -- with its monetary union -- produced a big demand in the economic situation for two or three years. That initiates a irruption in the trade balance. But recently, the trade balances has come bakc on the level of the 80s. In 1997, the trade balance made a 121,7 billion Mark surplus. In the same year, the external trade of the USA produced a $ 166,6 billions deficit. So, Germany reached the second grade among the biggest export nations, Lafontaine and Müller say.

The performance: Until 1992, the performance and the trade balance developed similar. Because of the German reunification in 1990, the federal deficit grew up to 29,9 billions DM. Now the deficit is reduced and the budget is almost balanced.

What about the problem of jobs moving abroad:

In 1995, the German direct investment has nearly doubled to 48 billion Mark. Is that because of high wages? The authors say it is the normal reaction of some particular branches like insurances, banks or chemical industries which have to buy strategic usefull businesses and should enter new markets with their big profits. So far, Germany has always been too inactiv on foreign markets. In 1993, Germany can present half of foreign direct investments of the US. German companies have mainly invested in western European countries. For example, there is an investment deficit in southeast Asia. In most cases, the German firms buy old companies and don’t build new ones. Nobody invests when the own company is in trouble. So, companies which expanded between 1990 and 1994 and produced jobs in foreign countries, produced jobs in Germany, too. There are only some workintensive particular branches which had to "emigrate" of Germany because of costs.

The direct investments of German companies in Germany have not been so bad. Among the big industrialized states, only Japan had a better investment rate in 1995.

Foreign investments in Germany are a little bit clammed. On the one hand, Germany is a very open market, on the other hand, however, the German currency was overvalued in the early 90s. Another point could be the absence of demand which reduces the atractivity of the location.

In general, the German competitiveness situation is not so bad as the public think it is. Germany still has good wages, a high standard of living and an efficient social-security system. But affluence and social security have to be produced: by highquality products or high prices, or by standard products and services which are produced cost-efficiently. Now, there’s a theory predominant in buisness and state which only focuses on the costs in production process.The policy of reducing the costs is causing a lot of problems in the social welfare state of Germany, the authors say:

The rationalization has caused a lot of unemployment. The costs of wages for every product have risen much lower than in other economically leading states.
The high unemployment is causing a crisis of social welfare state in two ways. More people are falling in the social net while less people are paying for it. Wages are rising because of the high contributions for social insurances. So, the people get back in the so-called first employment market very easily. The economic policy -- which is supposed to increase supply -- reduces the taxes on supply at the expenses of labour. That brings the national demand down. This policy -- which is only orientated on export -- is supposed to be payed by the state and by buisness (the business side is orientated on the national market and tax payers).
 

3.2.2. What must be done -- the authors' argumentation:

For a sustainable development Germany needs offensive innovations:

Germany and businesses only invest by 2,34 % of the GNP in innovations (Germany ranks sixth among the member's of the OECD). That is not enough. Germany needs more research in business and industry.

However, there is a question on costs: Today, businesses get tax reliefs on profits, and, sometimes, increases in wages stay under the increase of productivity. However, there is no opposition against rationalization, and so, there will be no innovation in businesses anymore because businesses only focus on rationalization instead on new products, the authors say.

Germany  needs more contractors who try to develop new products, instead of contractors who do only administer their buisness.("Kienbaum Akademie": only 16 % of the german economic leaders are creative).
The concentration and existence of monopols in the economy disables innovation. In economy, there is also too much bureaucracy. Patents do not become products which can stand the competition of the international market. Companies have to be organized more democratically and should have better systems of information and education. A less hierarchical system can better use the innovative ideas of employees and workers. The "footrace" of reducing the costs should not be supported by the state with changing of the working law. The tax law should be made easier and the state should give tax incentives to build markets for innovativ products, the authors argue.

4. Bibliography
Stefan Immerfall/Peter Franz:
Standort Deutschland, Stärken und Schwächen im weltweiten Strukturwandel, Leske + Budrich, Opladen 98
Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung:
Im Standortwettbewerb, Jahresgutachten 1995/96, Metzler-Poeschel, Stuttgart
Rolf Simons/Klaus Westermann:
Standortdebatte und Globalisierung der Wirtschaft, Schüren, Marburg 97
Oskar Lafontaine/ Christa Müller:
Keine Angst vor der Globalisierung, Dietz, Bonn, 98