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Nr. 60 / August 2009 Globalization and the German Economy Effect of Globalisation on the German Economy 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 in % 19 10 / 1 9 13 25 1 9 / 29 30 1 9 / 34 35 /3 8 19 50 19 55 19 60 19 65 19 70 19 75 19 80 19 85 19 90 19 95 20 00 20 01 20 02 20 04 20 06 in % was 3.8 per cent, putting Germany next to last in a comLiberalization of markets is the most important prerequiparison of OECD countries. While German companies site for the process of Globalisation. In fact, liberalization again increased investment in plant and machinery in has the capacity to increase countries wealth more than 2007 – by around 11 per cent compared with the previous development aid. Once developing countries like Southyear – public sector investment rose again for the first Korea, Taiwan, Singapore and Hong Kong for example time after years of stagnation. Direct investment is the became the so-called ecomost dynamic element in globaliExports are rapidly increasing nomically successful Asian sation. It increased from USD 13 “Tiger states” of the 1980s. In billion in 1970 to USD 1,500 billiGerman Export share 1910 to 2006 Europe, Ireland is a similar (share of exports related to GDP) on in 2007. Between 1985 and example for such a lucrative 2004, it grew by an annual ave50 development. In order to 45 rage of 14 per cent. Between 40 integrate more markets and 1995 and 2005, companies from 35 production locations worldwi30 all over the world invested almost 25 de, world trade has to be 20 USD 430 billion in Germany, the 15 further liberalized. The WTO fifth largest inflow of direct in10 has to be strengthened, trade 5 vestment in the world. At the 0 barriers and obstacles to the same time, German companies liberalization of the service utilised political developments sector have to be removed Source: SVR, diff. years.; destatis, national accounts (from 2000 revised national (EU eastern expansion) and accounts values) and the agricultural market technological developments (new has to be opened. ITCs) to open up locations all over the world and enhance their competitiveness. Globalization represents an intensified division of labour and an integration of domestic markets across boundaAnalysis of the direct investment statistics of Deutsche ries. In the period 1985 to 2004 the value of world exports Bundesbank for 1996 to 2004 shows that German direct of goods increased on average by 8 per cent annually, the investment abroad increased domestic employment on global output by 2.8 per cent. balance. This makes demands to Investments on a low level Even stronger than the value limit cross-border activities of of world exports of goods multinational companies – curInvestments from 1993 to 2006 was the increase of the value rently being debated in my own (share of nominal investments of the world exports of servirelated to nominal GDP) country, for example – all the ces with 8.8 per cent annualmore incomprehensible. 25 ly, in absolute numbers from 20 407 bn USD 1985 to 2193 bn Offshoring increased employment USD 2004. 15 on balance, in line with increased 10 flexibility in the labour market and Germany is benefiting par5 employees. Advancing liberalisaticularly from the process of 0 tion of the capital markets has globalisation. Exports now significantly facilitated financing account for 45 per cent of source: destatis (2007), VGR FS 18, R. 1.1 cross-border activities. Trading in economic output. Between and the total stock of listed bonds 2000 and 2005 its share in global trade averaged 9.7 per rose roughly fourfold between 1990 and 2005. According cent for goods, and 7.5 per cent for services. to Private Equity Intelligence, private equity totalling EUR 380 billion was acquired and invested in 2006 alone. This Increasing competition – new challenges for politics gave additional vigour to globalisation. The first address and companies for private equity investment in Europe was again the UK, with a share of 33 per cent of all European PE investment, Globalisation is increasing global competition between followed by France (15.2 per cent) and Germany (10.2 per companies and locations. Increasingly, companies are cent). operating and competing with each other in world markets. The attractions of a location help determine the level Germany’s third place position leaves on thing very clear of investment, growth and employment. For a long time, – because of the high tax burden, hardly any equity inGermany was not optimally placed for this competition. vestment funds are locating there. Despite the growth in The long period of stagnation and decline in investment importance of the PE industry, the German investment lasted until 2006. In that year, German net investment market is significantly lagging behind many other European competitors, and particularly the USA. There is still no sign of harmonised private equity legislation including provisions for buy-outs as the biggest sector and also broad areas of growth and expansion financing, although this is urgently needed. more innovation and investment, and less freedom in price setting, which reduces the purchasing prices for companies, remain largely unrecognised. Households as consumers also benefit from the positive welfare effects of globalisation through Improving conditions for locations US A I ta Ca ly na da Sp ai Fr n an c Be e lg iu m Ne Gre c th er e la nd s G er m an UK y 20 De 08 nm a Sw rk ed Po en rtu ga Au l Sw str it z ia er la nd I re la nd 2 an y er m nc e G ly Ita Fr a P or tu ga l Sp ai n iu m el g a B us tri A US A N et he rla nd s in % Ja pa n in % inexpensive products, Germanys tax burden is to high greater product diversity Politicians have recognised and incomes. one opportunity for improving Total tax burden on corporations (in percent of retained profits in 2005) conditions at national level by 45 Ultimately, the entire national econreducing the tax burden for 40 35 omy benefits from the side effects companies. Company tax 30 25 of globalisation. Growth and emreform has lowered the 20 ployment are boosted. Technologi15 nominal total tax burden on 10 cal progress is increasingly being companies as at January 1 5 0 passed on in the form of lower 2008 from around 39 per product prices. This reduces the cent to around 30 per cent. scope for wage increases. For emThis puts Germany nicely in Source: IW Köln (2007) "Standort Deutschland" ployers and unions, globalisation the middle of the European means a need for a paradigm shift. league table. The situation Decreasing scope for redistribution and growing competiwith profits is still not satisfactory, with German compation in labour markets is leading to the need for greater nies in the lower third in international comparisons in differentiation in wages. Wage policy needs to take this 2005. However, according to the corporate accounts stainto account, in the form of greater decentralisation. Relatistics of Deutsche Bundesbank, earnings improved sigtive wage rigidity leads to loss of employment. The greater nificantly in 2006. It is too early to say whether this is due intensity of competition particularly affects less qualified to economic growth, or whether German companies are workers with lower productivity. To find work, they need a catching up with other countries on a lasting basis. low-wage sector. This is being almost entirely overlooked in the current debate on minimum wages. This review shows two things – Germany is a beneficiary of globalisation, but is failing to take full advantage of its Globalisation creates jobs – denial costs jobs opportunities. The problem here is not the companies, so much as the location itself. Clearly, there is need for imThe fact that German products can provement in shaping the ecoPoor profit performance be sold in world markets despite nomic conditions, which is a the high level of labour costs is core responsibility of governInternational comparison of net profit margins 2005 also due to the fact that compament. In addition, the social nies are purchasing raw materials benefits – which have so far manufacturing industry commerce 8 and intermediates abroad at fapassed largely unnoticed – 7 vourable prices. Since 1995 the need to be emphasised more 6 foreign share in added value of 5 strongly to the general public, 4 German exports has grown signifiin order to increase acceptance 3 cantly. In 2006, German exports of of the needs for globalisation. 2 1 goods had a 44.8 per cent share 0 of foreign value added, compared Make use of globalisation – with 40.1 per cent in 2000 and overcoming barriers Source: Bach-Datenbank harmonisierter Jahresabschlüsse der EU-Kommission (2007) only 31.1 per cent in 1995. At the same time, the gross added value Globalisation is having a differgenerated by exports rose faster ent impact on different industrithan gross added value in the economy as a whole – in alised nations. Countries like the UK which are taking an 1995, exports generated 16 per cent of domestic gross aggressive approach to the economic and social chaladded value, increasing to around 20 per cent in 2000 lenges are prospering more than countries like Germany and 23 per cent in 2006. At the bottom line, this network and France which are trying to regulate globalisation. This economy creates new jobs, rather than destroying them. discrepancy in dealing with a trend which is not only unIn industries which benefited particularly from globalisastoppable but which we should not even be trying to hintion, employment rose between 1991 and 2005. der is due to the frequently distorted and one-sided perception by the German public. For example, globalisation Often, companies are able to secure domestic employis not given credit for the benefits to companies and conment to a great extent by offshoring specific areas of prosumers. German public opinion typically associates globduction and utilising increased possibilities for mixed costalisation with cuts in employment and offshoring. Positive ing from globally operating locations. According to a 2007 benefits, such as German Chambers of Industry and Commerce (DIHK) study, cost savings were the decisive motivation for 30 higher productivity, per cent of the companies investing abroad. improved competitiveness, Improving operation of the labour market greater funding for research and development, Investment in education increases the human capital of an economy. The OECD PISA study shows that Germany needs to increase its efforts in this area. German companies were already reporting substantial problems in recruiting engineers in 2006. One company in six employing engineers was facing these problems. UK nl an G er d m an y Fr an ce Ita ly EU -2 5 Sp ai n G re c Po e rtu ga l Fi Lu xe m bu rg I Ne rela n th er d la nd Au s s De tria nm a Be rk lg iu Sw m ed en in PPP of the lack of applicants. The macroeconomic consequences of this lack of human capital with its relevance to The structural transformation associated with globalisation innovation are serious. As a direct result of the shortage calls for increased flexibility in the labour market. Despite of engineers, the German economy lost added value totalrecord levels of employment, Germany has yet to succeed ling at least EUR 3.48 billion last year. One of the main in creating new jobs to replace those lost. One reason is reasons for the shortage of engineers is that international the rigidity in labour market regulation. Despite some procomparisons show that gress, such as increased partWealth is sinking - relatively Germany has too few stutime work, this still poses an dents enrolled in natural obstacle to hiring, particularly for GDP per capita in PPP in 2006 sciences and particularly small and medium-sized com(EU-25 = 100) engineering courses. The panies. The main sufferers from 300 high drop-out rate compared this are unskilled workers, which 250 with other courses and the are particularly affected by com200 low percentage of women petition from low-wage counare further exacerbating the tries. The goal must be to create 150 situation. new openings for unskilled job 100 seekers, for example in personal 50 Persuading policy-makers and domestic services. 0 to rethink Blocking a minimum wage Source : Eurostat (2007) Free movement of goods, A minimum wage not only does services and capital and an not help here, it actually reduces the opportunities. If improved entrepreneurial environment make possible wages for unskilled labour are set above the individual welfare benefits for all involved. In Germany, policy makproductivity, jobs are lost, and no new ones are created. ers are not giving adequate consideration to the needs for This is why it is useful to distinguish between the impact adjustment to globalisation. Too often, innovative and of wages on costs and in incomes. The various models of growth-promoting ideas are dismissed for ideological reacombined income seek to do this. Greater individual benesons (e.g. Genetic Engineering Act, use of nuclear enfits compared with straight transfer payments are also ergy) or there is a lack of political determination (e.g. dematched by greater added value in the economy as a regulating the labour market, delay in reducing red tape, whole. inadequate reforms in the federal structure). Here, the politicians need to become more open and provide strong Increase investment in human capital guidance. Globalization creates jobs 1995 2000 2005 Automobiles and automobile parts 575.000 691.000 706.000 Plastic goods 299.000 397.000 383.000 12.000 18.000 22.000 Production branch Secondary raw material Source: Federal Statistical Office of Germany (2007) In all, 47,998 vacant positions could not be filled because 3 Publication Globalization and the German Economy Almost all governments in developed economies appear to subscribe to the view that future economic prosperity and the maintenance of skilled employment depends on a country’s ability to attract and retain high value added industries. Increasingly, countries like Germany are competing with each other to secure these industries and governments are inevitably being drawn into the process. BDA Contact Dr. Hans-Jürgen Völz Tel. +49 30 2033-1950 Confederation of German Employers’ Associations House of German Business Breite Straße 29 10178 Berlin GERMANY The BDA in the WWW www.arbeitgeber.de VAD ist eine Publikation der BDA, die in komprimierter Form die Positionen der Arbeitgeberverbände darlegt. Die jeweils neueste Ausgabe finden Sie im Internet unter www.bda-online.de. 4