Monday, February 7, 2011

What the Economist lacks

The Economist drives me nuts. This week, beside the lead story, Egypt, the magazine headlines 'Why Germany is so successful'. This is a change from the usual 'Why Germany is not growing' stories that we became accustomed to whilst Britain was booming on the back of house price inflation and public expenditure growth.

But, naturally, the explanation for Germany's success largely ignores the real story: that Germany did not embrace the Anglo-Saxon model (despite the Economist's exhortations) and maintained an industrial model based on worker involvement in company decision-making, relatively coordinated wage bargaining, and long-term investment in skills and fixed capital. Along with (union-agreed) pay restraint, limited consumer credit growth and silly old-fashioned ideas about making high quality products, this put Germany in pole position once the Anglo model tanked.

The Economist does not entirely forget the diagnosis for Germany's ills that it trumpeted for years. So we learn that 'traditional German virtue is more effective thanks to liberalizing reforms of recent years', such as the Hartz reforms that increased labour market flexibility and conditionality in welfare payments, and rules undermining German companies' 'cosy' cross-ownership arrangements.

The problem with this argument is: why place the emphasis on the liberalizing changes, rather than what didn't change (despite two decades of external pressure to reform everything)? How do we know that the Hartz reforms are more important than Germany's rather generous welfare arrangements and employment protection, which encouraged the development of high levels of specific skills? How do we know that the liberalization of cross-ownership is more beneficial than the institutional arrangements which cushion German companies from short-term capital volatility, allowing patient, long-term investment to pay dividends in increased productivity?

We don't. It could just as easily be that the German model was working all along, but it took the collapse of the Anglo model to reveal it.