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The German Model in the 1990s: Problems and

prospectsSteven Casper; Sigurt Vitols

Online Publication Date: 01 June 1997

To cite this Article: Casper, Steven and Vitols, Sigurt (1997) 'The German Model in

the 1990s: Problems and prospects', Industry & Innovation, 4:1, 1 - 13

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D o w n l o a d e d B y : [ U n i v e r s i t y o f W a r w i c k ] A t : 1 0 : 4 9 2 5 D e c e m

b e r 2 0 0 7

Industry and hrnovation, Volume 4, Number I , June 1997

THEGERMAN ODELN THE 1990s:

PROBLEMSND PROSPECTS

STEVEN ASPERND SIGURT ITOLS

Ithe 1970s and 1980s West Germany received widespread attention in other

industrialised countries as an attractive national model of adjustment to slower

worldwide growth, greater competition from developing countries, and increasing

costs of energy and raw materials. The term Model1 Deutschland, which wasoriginally coined by the German Social Democratic Party in their reelection campaign

in 1976, came to symbolise adaptation to these new conditions through a strategy of

export-oriented industrial modernisation (Markovits 1982). The success of this strat-

egy can be seen most clearly in Germany's export performance; between 1970 and

1990, exports as a percentage of GDP increased from 21 to 32 percent, and the

balance of trade was negative in only one year (1980) and increased from an annual

average of 2.4 percent in the 1970s to 3.2 percent in the 1980s. In addition, Germany

had good labour market performance; when using the standardised OECD figures,

unemployment was lower than in western Europe and the US and the sharp trendtoward wage and income inequality in most other industrialised countries was largely

avoided (OECD 1993; 1994).'

At the heart of this 'German model' of adjustment was the upgrading of a broad

spectrum of industrial sectors in order to concentrate production on higherquality,

specialised goods targeted toward premium domestic and world markets. This

strategy, which has been variously named diversified quality production (Sorge and

Streeck 1988), new production concepts (Kern and Schumann 1986) and flexible

specialisation (Piore and Sabel 1984), is based on a combination of building on

traditional strengths - such as the technical ability and flexibility of skilled manual

workers - and the latest innovations. This capacity, which was visible as early as the

end of the last century when Germany became Europe's industrial leader and was

never eradicated by the relatively weak adoption of mass production methods in

industry after World War I1 (Chandler 1990; Herrigel 1995), was strengthened after

the first oil shock of 1973-4 through combining an upgrading of the 'neo-craftsman'

with the rapid diffusion of a number of innovations, most notably the microchip

(Katzenstein 1989b).

In his landmark study of the industrial profiles of ten countries, Porter (1990) notes

1 The performance of Germany thus constrasted markedly with the growing balance of trade problems of other

industrialized countries such as the US and the UK and the massive unemployment problems of other western

European countries. The divergence between this stellar export performance and less impressive GDP and

productivitygrowth may be explained by the absence of an indicator taking into account quality, especially

i~nportant or a country which has focused on the higher end of the market (Carlin and.Soskice 1997).

136&2716/97/010001-13 O 1997 Journals Oxford Ltd




b e r 2 0 0 7

the exceptional broadness of the 'competitive advantage' of Germany across a wide

range of sectors. The most visible sector among these 'success stories' is the

automobile industry, which for millions of consumers worldwide has come to

symbolise the craftsmanship and performance embodied in goods 'made in Germany.'

The great expansion of production of the traditionally low-volume luxury producers

Mercedes-Benz and BMW to increase sales at the high end of the market is a

significant story in and of itself. However, German industry's capacity to change has

been most clearly demonstrated in the dramatic transformation of Volkswagen, which

had been established expressly to mass-produce a low-cost car accessible to every

household ('the Beetle'). After the first oil shock, Volkswagen radically changed its

product market strategy by terminating production of the Beetle in Germany, intro-

ducing a range of new models aimed at significantly higher market segments and

purchasing the niche producer Audi (Streeck 1984; 1989). This example was re-

peated again and again, not only in sectors familiar in the literature in English such

as industrial machinery (Herrigel 1990; 1995) and chemicals (Allen 1989) but also in

sectors such as steel (Biinning et al. 1993), food processing, textiles and wooden

furniture (Pries, Schmidt, and Trinczek 1989).

While the 'weighting' of the importance of different factors differ somewhat, most

analyses view the contributions of business, labour, and the state as crucial for the

success of the German model. Business has shown a high capacity to coordinate and

cooperate through a dense network of industry associations, local chambers of

commerce and industry, and extensive interlocking directorates and shareholdings

between banks and nonfinancial companies. This coordination capacity has helped

business pursue its collective interests in the political arena, to participate in

the provision of collective goods important for restructuring such as skill formation

and to help avoid the kind of destructive price competition that has plagued

adjustment in other countries while at the same time promoting export competitive-

ness (Esser, Fach, and Dyson 1983; Soskice 1992; Katzenstein 1989a; Vitols 1995).

Perhaps best captured in the phrase 'conflictual partnership' (Miiller-Jentsch 1991),

labour - through industrial unions at the sectoral level, works councils at the plant

and company level, and employee representation on the boards of larger companies

- has cooperated in the often drastic measures involved in adjustment withoutlosing their capacity to pressure employers to take the 'high road' and to mobilise the

rank-and-file when the integrity of the industrial relations system is threatened

(Streeck 1992;a Miiller-Jentsch 1995; Wever 1995). Finally, the state has contributed

by providing a corporatist regulatory framework supportive of collective action

by both labour and capital, by funding important elements of the 'institutional

infrastructure' for competitiveness such as research institutes and day-release schools

for the dual training system, and by subsidising the costs of' adjustment through

early retirement pensions and short-time work allowances (Esser 1983; Vitols

contribution to this volume). Although each of these three actors is potentiallypowerful enough to disrupt the system, their cooperation has been 'rewarded'

throughout the 1970s and 1980s through export success and reasonable profits for

business, high wages, a high level of income equality and a moderate level of

unemployment for labour, and moderate debt levels and a strong balance of payments

position for the state.




b e r 2 0 0 7

TH EGERMANODEL IN THE 1990s 3

It would of course be incorrect to say that this process of adjustment was not

accompanied by considerable discord considering the correct strategy to follow;

Katzenstein (1989b: 5) for example notes that swings of opinion on the viability of

the German model resemble a fever chart. However, the pressure for reform created

during the recessions in the mid-1970s and early 1980s has paled in comparison with

the level of criticism of basic: economic and social institutions generated since the

exhaustion of the 'unification boom' of 1990-92. Since then economic growth has

been less than satisfactory; the 1992-3 recession was quite sharp, with real GDP in

the first quarter of 1993 two percent below the previous year's level. The recovery

since then has been quite modest, with annual growth of about 2 percent in 1995 and

the first three quarters of 1996 after 3 percent growth in 1994. Business profitability

reached a post-war low of 1.9 percent of sales before taxes in 1993 and increased

only to 2.4 in 1994 and 2.5 in 1995 (Deutsche Bundesbank 1996). Of greater concern

to the public at large, however, has been the dramatic deterioration in the employ-

ment situation; registered unemployment had risen by December 1996 to over 4

million persons or 10.8 percent of the labour force, the 'highest levels seen since

1933' as ominously reported by the Financial Times.

The domestic debate over the causes of the current crisis have been dominated by

large sections of the business community and liberal-conservative ruling coalition.

They have focused on the increasing unattractiveness of the institutions of the

German model and 'Standort Deutscbhnd' (production location Germany). These

criticisms have focused on the unions and the state. Critics argue that German

employers face a major cost disadvantage relative to other countries due to highwages, social security contributions and taxes on business. Labour costs are exacer-

bated by a generous system of entitlements, including requirements that employers

provide 100 percent sick pay for 6 weeks and unemployment benefits with a net

replacement rate of between 80 and 90 percent of pay. Strong unions, works councils

and dismissal protection legislation have constrained flexibility in the use of labour.

Because wage levels are set through industry level bargaining, employers complain

that they cannot design incentive systems within the firm needed to motivate

employees. Finally, the business community argues that the state bureaucracy has

imposed unnecessary barriers on innovation, most notoriously in strict regulations ongenetic research. In addition to the weak unemployment, profitability and GDP

growth figures mentioned above, failure of Model1 Deutscbhnd is seen by this group

in the rapidly growing gap between inward and outward investment, the lack of

employment growth in the service sector, and chronic weakness in 'high-tech'

industries of the future such as information technology and biote~hnology.~

These critics eye the 'American model' with envy. They have initiated a far-reach-

ing program for privatisation and the deregulation of labour, financial and product

markets in order to achieve a cheaper and more flexible labour force, lower taxes and

less expensive financial, telecommunications and transportation s e r ~ i c e s . ~n

the

2 See the recent annual reports of the German Council of Economic Advisors (Suchverstandige~~rc~f)or a more

extended treatment of these criticis~ns.

3 See for example the series of articles on 'Modell A~treri ka' un by Wirscl~r~jiswocl~e,he main German business

weekly, in 1996.



D o w n l o a d e d B y : [ U n i v e r s i t y

o f W a r w i c k ] A t : 1 0 : 4 9 2 5 D e c e m b e r 2 0 0 7

political arena, Chancellor Helmut Kohl has announced an initiative to cut unemploy-

ment in half by the year 2000. To achieve this goal he has pushed through legislation

to weaken dismissal protection, to lower the statutory minimum requirement on

employers for sick pay from 100 percent to 80 percent of normal pay, to reduce

unemployment and income assistance benefit rates and eligibility for early retirement

pensions, and to deregulate financial markets and increase the supply of 'risk capital '

In addition, commissions have been established in order to develop proposals to

reduce the cost burden on employers through the fundamental reform of the tax and

social security systems.

In the collective bargaining arena, the increasing desire of large companies to offer

customised incentives to highly skilled workers and lower the wages of the unskilled

have led to proposals to significantly weaken the cornerstone of the German system

of coordinated bargaining, the sectoral-level collective agreement (Fliichentnrifver-

trag) (Carlin and Soskice 1997). Impatient with the pace of reform, record numbers

of companies have left or threatened to leave employers' associations in order to

negotiate company-level agreements; this phenomenon of Verbands-ucht, which has

been particularly strong in east Germany and during the 1992/3 recession, has raised

the specter of the loss of the coordinating capacity of capital, one of the cornerstones

of the German model (Sylvia 1997).

While not sharing the far-reaching deregulationist agenda of the business com-

munity and the governing coalition, academics more closely associated with the

unions and social democratic party have contributed to the pessimism about the

survival capacity of German institutions. Faced with American competition in high-

technology industries and East Asian success in upgrading the quality of mass-

produced consumer goods, they see little room for product market strategies empha-

sising incremental innovation in established technologies. One view is that the

declining relative importance of high value-added niche markets in traditional indus-

tries is leading to an 'exhaustion' of the potential of the German model (Streeck

1996). While German companies have long been leaders in established science based

industries such as pharmaceuticals, chemicals, and mechanical engineering, German

companies are losing their competitive edge now that the pace of technological

change has quickened and need a radical change in the deep conservatism of their

business strategies. 'Imitate and improve' innovation strategies are no longer adequate

given shorter product life cycles Uiirgens and Naschold 1994). The risk-averse and

inward-looking nature of long established and tight interfirm networks do not provide

sufficient sources of new technology necessary to survive in an increasingly

globalised and dynamic competitive context (Kern 1996). Others note that the

German apprenticeship system provides skilled workers with deep knowledge within

particular vocations, but not broad skills needed to work effective in the polyvalent

work teams that many highly innovative American and Japanese companies have

successfully created (Herrigel and Sabel 1995).

In evaluating the problems and prospects of the German model in the 1990s, the

editors of this special edition, both of who are non-Germans with a long familiarity

with Germany, have been surprised by the extent to which the debate has been

focused on the particularities of the German case. While this nlay be attributable in





THEGERMANODE L IN T HE 1990s 5

part to the framing of the debate in terms of the 'uniqueness' of Model1 Deutschland

rather than on the institutional preconditions of high-quality incremental innovation,

it is nevertheless striking that the German debate parallels a general discussion across

the advanced industrial countries about the inadequacy of 'their' current models and,

furthermore, about the decreasing effectiveness of industrial policy due to globalisa-

tion and increasing economic complexity.

This evaluation is guided first of all by the premise that, while the effectiveness of

older forms of industrial policy may be decreasing in this new environment, this is

not to say that the potential and desirability of newer forms of national industrial

policies has disappeared. In the 1950s, 1960s and 1970s, processes of industrial

restructuring were heavily shaped by state policies and institutions (Zysman 1983). In

healy industries such as steel, ship-building, or petrochemicals, the predictability of

the effects of industrial policies was relatively high. Governments could provide

investment, organise domestic markets, offer protection against foreign competition,

and champion industry abroad. These policy instruments were especially effective in

influencing large, vertically integrated industries relying on mass production tech-

niques. Large enterprises with hierarchical management structures could easily be

created and supported by the state (Kitschelt 1991).

New industrial policies must take into account that, in most manufacturing indus-

tries today, the modalities by which governments can influence the organisation of

industry structures has become more subtle. The innovation system has become more

complicated, depending on complex relationships between large and small firms aswell as diffuse networks of experts linking companies with universities and other

laboratories of innovation. The policy instruments used to manage the immediate

post World War I1 industrial economy have become less viable. Within a more

decentralised economy, the central problem has become the management of com-

plex forms of cooperation within a market setting. Traditional industry policy

instruments, such as the use of finance to support strategic industries, have been

abandoned because it is difficult for governments to accurately 'pick winners'.

Instead of directing technology in the classic style used by Japan's MITI throughout

the postwar period, more countries are today trying to provide sophisticated technol-ogy infrastructures that subsidise the cost of innovation and facilitate cooperation

benveen firms and the scientific community but do not attempt to direct its path

(Liitz 1993).

This volume develops an xlternative view of the 'German model' in the 1990s

which has implications for both the domestic debate and for a broader understanding

of the potential and limits of industrial policy. We accept the criticism that direct

government policy cannot directly shape the competitiveness of industry. But this

does not imply that convergence towards a radically deregulated political economy is

the best or only competitive solution. Industrial policy must be conceived of in abroader sense than the traditional focus on direct state actions to promote competi-

tiveness. Particularly within Germany, a broader set of societal institutions help

influence how companies create product market strategies. In addition to the

traditional focus on financial incentives through selective credit targeting and R&D

incentives, these include, at a minimum, institutions influencing labour markets





(industrial relations and education and training systems), capital markets (banking

systems and nonbank financial institutions), innovation systems (institutions for RSrD

and technology transfer), and the relationship between conipanies ( industv associa-

tions, chambers of commerce, takeover and competition policy) (Soskice, 1992;

Vitols contribution to this volume).

We argue that companies engage national institutional f ran~eworks o support the

development of organisational competencies needed to compete successfi~lly.We

examine the link between national institutional frameworks and the ability of compa-

nies to create the organisational. competencies required to support particular product

market strategies. Many industries can be categorised by the type of product market

strategy companies must adopt t o innovate. Most high technology industries, such as

computer software or biotechnology, necessitate product market strategies focusing

on radical or product innovation. More established science based industries, such as

chemicals or mechanical engineering, involve incremental innovation in the organis-

ation of sophisticated production processes and long-term relationships with cus-

tomers, both before and after sales (see Soskice contribution to this volunle). Each of

these strategies necessitates the creation of different patterns of inter-firm relation-

ships, decision-making structures within the company, career paths for workers and

managers, and ownership relationships. For example, process innovation is usually

best achieved through long-term relationships with customers and other companies,

consensus style management structures, close linkages between skilled workers and

engineers, and long-term or patient financial relationships. Radical innovation de-

mands much more managerial autonomy in decision-making, the ability to quickly

reorganise teams of workers, scientists, and managers within the company, more

numerous strategic alliances wi th o ther companies, and, in order to support innova-

tive small companies, the availability of large pools of high risk venture capital (Teece

1986).

National political economies are characterisecl by con~plexesof institutions in

different areas (industrial relations, capital markets, education and training, inter-com-

pany relations) which companies engage to support particular product market

strategies. We argue that German companies are particularly competitive in tra-ditional science based industries because of the existence of national institutions

which support the necessary company level competencies needed to succeed in

these areas. The vocational training program helps develop extensive skills among

manual workers that allow them to effectively work with engineers and scientists.

Long-term employment relationships are facilitated by the establishment of powerful

employers associations that prevent companies fi-on1 'poaching' each other's em-

ployees. Works councils mandated by codetermination Law promote long-term coop-

eration between management and workers, while company law promotes consensus

decision-making and long-term career paths among managers. The bank centeredfinancial system helps support long-term product market strategies. Finally, a large

complex of research institutes, links between companies and technical schools, and

technological promotion fiinds provided by government support research and devel-

opment, allowing new technologies developed elsewhere to be rapidly diffused

throughout particular sectors.




b e r 2 0 0 7

THE ERMANODEL IN THE 1990s 7

Because most advanced industrial countries have very different national institu-

tional frameworks, this leads to 'trade-offs' in competitive advantage - no one system

support all product market strategies. The improvement in capacity to promote

certain kinds of industries is likely to reduce competitive advantage in other sectorsin which product market strategies are dependent on the creation of different

organisational competencies (Porter 1990; Soskice contribution to this volume). For

example, because German national institutional frameworks allow numerous long-

term relationships and consensual decision-making styles to be created both within

and across companies, they inhibit the very different organisational strategies needed

to support radical product innovation (see Soskice contribution to this volume).

In opposition to the view that the capacities of nation-states are waning, our

approach takes a more differentiated view that state capacities are in many ways

increasing. However, instead of direct support for chosen industries or companies,governments can now more usefully support broader institutional complexes that

companies engage to successfully compete, such as those supporting the training,

industrial relations, and research and development systems. German policy-makers

are particularly fortunate in that there are numerous para-public institutions (Katzen-

stein 1987) linking neo-corporatist patterns of private intermediation with public

oversight. The capacity of the individual firm to deal with increasing risk and

information complexity is decreasing. Within Germany this deficit of the individual

firm can be partially overcome by the state through supporting the infrastructure of

para-public institutions. Trade associations, employers associations, unions, and avariety of public bodies such as Chambers of Commerce encourage cooperation

between companies through information sharing and risk pooling.

In order to contribute to this debate, the editors of Industly an d Innovation

(formerly the Journal of Industy Studies) asked us (both researchers at the Social

Science Center Berlin (WZB)) in the summer of 1995 to assemble a collection of

articles on developments in German industry in the 1990s. We have gathered an

interdisciplinary set of articles written by economists, sociologists, and political

scier~tistsat or affiliated with the WZB, which were intensively discussed at a

workshop in Berlin in the spring of 1996. Each of the articles reflect the WZB'semphasis on combining institutional and interdisciplinary analysis in explaining

aspects of economic and social behavior. In keeping with the general orientation of

this journal and also in the spirit of Katzenstein's (1989) earlier edited volume, we

asked for articles with a sectoral emphasis. Sectors covered include airlines, automo-

biles, banking, steel, as well as a general analysis of high-technology industries,

providing a good cross section of the German economy. They include both manufac-

turing and service sector industries encompassing both traditional and more ad-

vanced technologies. To provide a broader context, we also present two more

general overviews of the industrial structure and institutional organisation of theGerman political economy.

The first of these two overview articles, by Vitols, provides an institutional analysis

of German industrial policy and its contribution to successful adaptation to the

changing global economy and the deep world recessions of the mid-1970s and early

1980s. While others have focused on the role of inter-firm and bank-firm relation-




b e r 2 0 0 7

ships, regional governments or cooperative labour relations as the main source of

German industrial competitiveness, Vitols argues that the national government plays

a key role in supporting the modernisation of industry. Although the state has in a few

cases taken the initiative in sectoral restructuring or the development of new

technologies, indirect and non-targeted support has been more significant. On the

one hand, the national regulation of labour markets has discouraged price compe-

tition and imposed a 'productivity whip' on companies, on the other hand, through

the supply of resources to sub-national and sectoral actors, the federal government

has supported the investments in skills, R&D and capital equipment needed for

industrial modernisation. This support of an institutional infrastructure is particularly

important for the large and modern SME sector (the Mitlelst~~nd).evelopments

during the 1990s, he argues, illustrate both the continued success of this infrastruc-

ture in slipporting adjustment and the ultimate dependency of these institutions on

strong domestic political support and adequate international demand for high quality,

medium-tech products.

The second overview article, by Matraves, provides an analysis of the German

industrial structure in contrast with its main European trading partners. This overview

confirms the long-standing consensus that Germany's comparative advantage lies in

medium technology manufacturing industries such as chemicals or machine tools.

Matraves shows that Germany is not losing its competitiveness in these core indus-

tries; indeed its advantage in medium technology sectors has increased in recent

years. While her temporal analysis shows a marked decline in the competitiveness of

higher technology industries in Germany, Matraves argues that an economy does not

have to be competitive in all types of industries to be successful. She therefore

concludes that the general pessimism concerning the competitiveness of German

manufacturing industry is unfounded.

In an analysis of developments in the banking sector, which is important both as

a provider of financial services and an employer in its own right, Deeg argues that a

two-sector model distinguishing between the Mittelstand and large companies must

be used to asses the impact of globalisation, financial liberalisation and unification on

the capacity of the banking system to support industrial modernisation in the 1990s.

These trends have led to significant shifts in the financing patterns of large companies

away from loans from a small number of Hausbanken (i.e. main banks with which

companies have a long-term relationship) to credits from a larger number of inter-

national banks and securities-based finance; however, the most important element of

the long-term investment system, long-term bank shareholdings in these large compa-

nies, has remained intact in the 1990s. Similarly, the capacity of the savings banks and

credit cooperatives, the main bank groups serving Mittelstand companies, to provide

long-term finance has not been significantly reduced by these changes. While this

system has been important for supporting modernisatioll in traditional branches, the

importance of long-term relationships at the same time represents one (but not theonly) barrier to the start-up of new innovative companies. Attempts in Germany to

set up special financing vehicles for high tech startups have been only partially

successful.

The articles by Soskice, Casper and Lehrer each examine different aspects of

innovation. Soskice provides an institutional analysis explaining why German





companies are successful in pursuing sophisticated product market strategies based

on incremental innovation but have difficulties competing in high technology indus-

tries. He argues that the incentives provided by the German institutional system

,

discourage top managers, researchers, and investors from pursuing investments inradical new innovations. However, Soskice also shows how this same incentive

structure encourages actors to invest in long-term relationships with employees,

financiers and other companies that lead to success in high value added medium-

technology (or 'diversified quality production') strategies.

Lellrer and Casper analyse successful cases of organisational innovation. In a

balanced assessment of traditional German corporate governance model, both articles

show that elements of this model can be a barrier to radical change and have been

circumvented by a number of important companies in order to achieve success in the

1990s. Casper's article examines how organisational innovation in the auto industryinfluences the effectiveness of para-public institutions. As pointed out in earlier

contributions, a distinctive feature of the German economy is the existence of a large

and productive base of small and medium sized Mittelstand. companies. Para-public

institutions, such as Chambers of Commerce, trade associations, and local research

institutes provide a public infrastructure helping groups of Mittelstand companies

develop research and development, quality control, training and other important

competencies that they are too small to invest in individually. Case studies of the

newest East German car production networks, however, show that Ope1 and Volks-

wagen, the two major companies involved, are bypassing these traditional supplier-final assembler links and creating their own supplier chains involving minimal

technical collaboration with local suppliers and the delegation rather than sharing of

risks. As a result, few Mittelstand companies are engaging these para-public institu-

tions and local and regional Mittelstand networks remain underdeveloped in eastern

Germany. This paradigm, if diffused, could potentially have adverse consequences for

Mittelstand suppliers in west Germany not only of the automobile industry but also

of other branches.

Lehrer's analysis involves changes in decision-making structures. Extending re-

search done on the importance of co-determination rights in influencing companystrategy, Lehrer notes that German company law encourages the development of

similar consensus-based decision-making patterns among top management. Lehrer

argues that consensus decision making patterns and career structures promoting

long-term employment and functional specialisation prompted Lufthansa manage-

ment to adopt strategies broadly resembling 'diversified quality production' that was

used successfully in the car and machine tool industries in the 1980s; however, a DQP

strategy proved nonviable when liberalisation of the European civil aviation market in

1987 forced Lufthansa to compete directly with other carriers such as British Airways.

Lufthansa has in the 1990s radically restructured its organisation to compete success-fully by circumventing traditional decision-making structures and imposing Anglo-

Saxon style unilateral control, shorter-term employment and extensive job rotation

across divisions. While highlighting the suitability of consensus-based decision mak-

ing for supporting incremental innovation, this article casts doubt on the effective-

ness of German corporate governance institutions for supporting radical change.





All in all, the contributions to this volume support a more balanced and 'contin-

gently optimistic' judgment about the viability and fiiture of the German model than

that reflected in the domestic debate. On the basis of these contributions and a

number of studies that have received relatively little attention, the following general

conclusions are reached:

(1) the competitiuenessproblern of German industry in its traditional area of strength- 'medium-tech manufacturing' - has been exaggerated. Companies have taken

great steps to rationalise and have maintained market share in most of these

industries. Furthermore, some of the 'symptoms' of weakness of Standort

Deutschland - large investment by German companies abroad - are at least in

part due to the attempt by companies to expand production and sales in North

American and Asian markets. Furthermore, Germany does not have an absolute

incapacity in high-tech as evidenced by strengths in particular sectors such as

laser technology (DIW 1975). One must therefore separate discussion of the

current employment problem from the competitiveness issue, a link which is

oversimplified in the current debate;

(2 ) a number of the fundamental claims made by the neo-liberal reformers regarding

structural barriers to competitiveness are inaccurate or only partially true.

Business taxes are not unusually high once factors such as very rapid depreciation

allowances are taken into account. Furthermore, high hourly labour costs in

Germany are largely compensated for by higher levels of productivity; thus unit

labour costs are comparable to or lower than in the US, Japan and the UK

(Koddermann 1996). Finally, the collective bargaining system has been less rigid

than claimed as evidenced by the willingness of unions and works councils to

support 'regulated flexibility', for example in supporting the establishment of

more incentive pay and the creation of 'time accounts' for allocating working

hours over longer periods of time. Thus the effect of stn~ctural actors on the

current unemployment crisis have been overestimated. Conjunctural factors have

played a greater role, including the sudden reduction in the use of debt to finance

unification in 1992 and the stifling of the recovery through deflationary monetary

and fiscal policy imposed by the Madstrict Treaty convergence criteria for

membership in the European Monetary union" (this view is to a large extent

shared by Carlin and Soskice (1977)).

(3) the current proposals for radical reform along the lines of the US model thus

threaten to create the 'worst of both worlds' - on the one hand little additional

employment in high-tech and the service sectors, on the other hand the under-

mining of important con~petenciesn medium-technology industries. An improve-

ment in the employment situation in Germany would thus be better served by

incremental adjustments in the current system of institutions, such as introducing

new cross-cutting fields of study in sciences and engineering, by improving

4 These criteria require that the government h~idgct eficits aniount to no more than 3 perccnt o f GI>I', that

outstanding government debt be no higher than 60 percent o f G1)lJ, ant1 th;lt inIl;~rionbe no greater than 1 5

percent of the level in the three best performing member states.





THE EWN MODEL IN THE 1990.5 1 1

management education and by creating new financial institutions for venture

capital hived off from the rest of the financial system. Furthermore, demand for

medium-tech products might be boosted by loosening up the Maastrict conver-

gence criteria and by growth in eastern Europe (Schumacher 1996).

While the ambitions of the neo-liberal reformers are great, the most radical parts of

their proposals for the 'importation' of the Anglo-American model have yet to be

implemented. There are recent signs that legislative initiatives are flagging due to

internal splits in the liberalconservative coalition, that business flight from associa-

tions is slowing down and that businesses are moderating their demands as

restructuring succeeds and profitability recovers. Nevertheless, the potential for

change in the German model remains great. Thus, while reports of the death of Model

Deutschland are greatly exaggerated, the 'patient' is worthy of continued close

monitoring.

Allen, Christopher S. 1989: Polit ical Consequ ences of C hange: The Chemical Industry. In

P. Katzenstein (ed), Indushy and Politics in West Germany. Ithaca: Cornell University

Press.

Bunning, J., G. Fobbe, U. Hofies, W. Marx and H. Uske 1993: Moderne Zeiten - Alte Bruncbe.

Neue Tecbnologien und neue Produktionskonzepte in der Eisen- und Stublindustrie.

Opladen: Westdeutscher Verlag.

Carlin, Wendy and David Soskice 1997: Shocks to the System: the German Political Economy

under Stress. National Instituti? Economic Review, 15 9 (1/97): 57-76.

Chandler, Alfred 1990: Scale and Scope: The Dynamics of lndustrial Cupitalism. Cambridge,

Mass.: Belknap.

Deu tsche Bundesbank 1996: West German enterprises ' profi tabil ity and financing in 1995.

Monthly Report 4 8 ( 1 1 ) : 33-45.

DIW 1995: Techn ologische LeistungsF%higkeit de r westd euts che n Wirtscha ft trow e inze lner

Schwachstel len unterschdtzt . DIW Wocbenbericbt, 62 (33): 571-8.

Esser, Josef, W olfgang Fach a nd K cnn eth Dyson 1983: Social Market a nd M odernization Policy:

West Germany. In K. Dyson and S. Wilks (eds), Industrial Crisis. New York: St. Martins.

Hem gel, Gary 1990: Industrial Organization an d th e Poli tics of Industry: Centralized and

Decentralization. Ph.D., Political Science, MIT, Cambridge, Mass.

Hemgel, Gary 1995: Industrial Constructions: The Sources of German lndustrial Power.

Cambridge: Cambridge University Press.

He mg el, G . and C. Sabel 1995: Craft Produ ction in Crisis: Industrial Restructuring in G ermany

during the 1990s. Unpublished manuscript .

Jurgens, Ulrich, and Frieder Naschold 1994: Ar beits und industriepoli t ische

EntwicklungsengpQse de r deutsc hen Industrie in den neun ziger Jahren. In W. Zapf and

M. Dierkes (eds), Institutionvergleicb und Institutiondynamik. WZB+zhrbucb 1994. Berlin:

Edition Sigma.

Katzenstein, Peter 1987: West Germany: Growth of a Semi-sovereign State. Philadelphia:

Temple University.

Katzenstein, Peter 1989a: Industry in a Changing West Germany. In P. Katzenstein (ed),

Industry and Politics in West Germany. Ithaca: Cornell University Press.

Katzenstein, Peter J. (ed) 1989b: Industry and Politics in West Germany. Ithaca, N.Y.: Cornell

University.









TH EGERMAN ODEL IN T H E 1990s 13

Wever, Kirsten S. 1995:Negotiating Competitiveness: Emplojlment Relations and

Olganizational Innovation in Germany and the United States. Cambridge, Mass.: Haward

Business School Press.

Zysm;tn, John 1983: Governments, Markets and Growth: Financial Systems and the Politics of

Industrial Change. Ithaca: Cornell University Press.

Documents

Casper-The German Model in the 1990s Problems and prospects.pdf