shree diwe final.docx

7/30/2019 shree diwe final.docx

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1 DIWE Project Country Analysis - Germany

Table of Contents

Executive Summary ................................................................................................................................. 2

Introduction: ........................................................................................................................................... 3

Long Term Trend in Economic Growth ................................................................................................... 4

Agriculture, Forestry, and Fishing ....................................................................................................... 4

Mining and Minerals ........................................................................................................................... 4

Industry and Manufacturing ............................................................................................................... 4

Energy ................................................................................................................................................. 4

Services ............................................................................................................................................... 5

Tourism ............................................................................................................................................... 5

Indicators of Economic Development ..................................................................................................... 5

Indicators ............................................................................................................................................ 5

Growth: ........................................................................................................................................... 5

Human Development Index: ........................................................................................................... 7

Other Measures .............................................................................................................................. 7

Factors Driving Economic Growth in Germany and Factors contributing to Poor growth ..................... 8

Germany: An Economic History ............................................................................................................ 10

Wirtschaftswunderzeit: 1945-57 ...................................................................................................... 10

Slowing Down: 1958-73 .................................................................................................................... 12

The three oil shocks: 1974-85 ........................................................................................................... 12

Single Unified Market: 1986-90 ........................................................................................................ 14

Country Risk Assessment ...................................................................................................................... 15

Risk Assessment ................................................................................................................................ 15

Germany

A Competitive Analysis ................................................................................................... 16Exhibits .................................................................................................................................................. 17

References ............................................................................................................................................ 35


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Executive Summary

This report is an attempt to analyse Germany in terms of its long term trends in economic

growth, indicators of and factors driving the economic development, major economic policy

changes and crises faced by the country and risk associated with trade perspective.

Germany is one of the most developed countries in Europe. Though productivity is very high

in agriculture, its agriculture sector is declining. Similar is the case with its forestry, fishing

and mining industry. Germany is very robust in its manufacturing sector and excels in

automobiles, machine tools and chemicals. It has been taking several initiatives in renewable

form of energy in the energy sector. Services sector has been growing substantially with

banking and finance being the most prominent ones followed by tourism.

Human Development Index of Germany is 0.935 in year 2005 and it ranks 22nd in HDI value.

It ranks 20th in terms of GDP in year 2005 (source: hrdstats.undp.org). There is also a

growing concern over declining population of Germany. It has high literacy rate, life

expectancy and standard of living. This proves that Germany is a high income developed

country.

Till recently German economy was characterised by high tax rates which hampered

development to a large extent. Thus, Germany has implemented rounds of tax reductions to

support economic growth, but still they are at high levels compared to other developed

countries. Increased focus on R&D contributes majorly to economic growth. Though it is a

robust economy it also has been seriously hit by the ongoing recession.

Germany has a history of lot of turmoil and crises. It had to face defeats in both the world

wars with it taking the most hit in both of them. It also saw the division and unification of

Eastern and Western Germany. It also had to face the side effects of fall of fixed exchange

rate system in 1972 as its exports became expensive. It was successful in taking measures to

differentiate itself in terms of export and thus sustain the oil shocks to some extent. In spite of

all the adversities Germany grew at a very high rate to be one of the most developed

countries in the world.

Germany ranks seventh in the world competitive index (source: World Economic Forum). It

is the best country in terms of innovation and infrastructure. It also has significant advantage

in terms of its markets which are one of the most competitive in the world. Germany has very

high volumes of trade internationally, both in goods as well as capital markets.


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Introduction:

Germany is Europes largest economy and most populous nation. It is located in Central

Europe and has common borders with Denmark, the Netherlands, Belgium, Luxembourg,

France, Switzerland, Austria, the Czech Republic and Poland.

Germany has a total area of 356910 square kilometres. It has a population of approximately

82 million (including 7.2 million foreigners). It accounts for the largest population among the

member states of the European Union and is home to the third-largest number of international

migrants worldwide. It is one of the most densely populated countries in Europe with 229people per square kilometre. Only Belgium, the Netherlands, Great Britain and Northern

Ireland have a higher population density in European Union.

From historical perspective, Germany came into existence with the advent of the Cold War

when two German states were formed in 1949, the western Federal Republic of Germany

(FRG) and the eastern German Democratic Republic (GDR).

But later on the decline of the USSR and the end of the Cold War allowed for German

unification in 1990. Since then, Germany has expended considerable funds to bring Easternproductivity and wages up to Western standards.

In January 1999, Germany and 10 other EU countries introduced a common European

exchange currency, the euro.

Germanys currency is Deutschemark. Germany has gender ratio of about 1.05 of male to

female. The official language of country is German.

Germany is a federal parliamentary republic of sixteen states. The capital and largest city is

Berlin. Germany is a member of the United Nations, NATO, G8 and OECD. It is a major
http://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/List_of_countries_by_immigrant_populationhttp://en.wikipedia.org/wiki/List_of_countries_by_immigrant_populationhttp://en.wikipedia.org/wiki/List_of_countries_by_immigrant_populationhttp://en.wikipedia.org/wiki/List_of_countries_by_immigrant_populationhttp://en.wikipedia.org/wiki/European_Union


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economic power with the world's third largest economy by nominal GDP and the fifth largest

in purchasing power parity.

The weather of Germany always remains pleasant; there is no much difference in average

temperature here. The maximum and minimum temperature used to be 19 degree and 1

degree Celsius here. The humidity of Germany is between 60% and 90% and annual rainfallis between 600 to 800 mm.

Germany remains a key member of the continent's economic, political, and defence

organizations. Of the world's 500 largest stock market listed companies measured by revenue,

the Fortune Global 500, 37 companies are headquartered in Germany. In 2007 the ten biggest

companies were Daimler, Volkswagen, Allianz , Siemens, Deutsche Bank, E.ON, Deutsche

Post, Deutsche Telekom, Metro, and BASF.

Long Term Trend in Economic Growth

A brief of factors, which are major contributors in Germanys GDP is given below,

Agriculture, Forestry, and Fishing

In 2007 agriculture, forestry, and fishing accounted for only 0.9 percent of Germanys grossdomestic product (GDP) and employed only about 2 percent of the population, down from 4

percent in 1991.Despite Germanys high level of industrialization, roughly one-third of its territory is covered

by forest. The forestry industry provides for only about two-thirds of domestic consumption

of wood and wood products, so Germany is a net importer of these itemsAfter a quota imposed by the European Community Common Fisheries Policy, in 2005 thefishing industrys total catch was 330.4 million tons.

Mining and Minerals

Coal is Germanys most important energy resource, although government policy is to reduce

subsidies for coal extraction. Coal production has declined since 1989 as a result ofenvironmental policy and the closing of inefficient mines in the former East Germany. In2005 Germany produced 24.9 million metric tons of hard coal and 177.9 million metric tonsof brown coal. As of January 2006, proven oil reserves were 367 million barrels, a modestamount by international standards but still the fourth largest reserves in the EU.

Industry and Manufacturing

Industry and construction accounted for 29.6 percent of gross domestic product in 2007, acomparatively large share even without taking into account related services. This sectoremployed nearly 26 percent of the workforce.

Energy

In 2004 Germany was the worlds fifth largest consumer of energy; total consumption totaled14.7 quadrillion British thermal units. The majority of its primary energy, including 90
http://en.wikipedia.org/wiki/Revenuehttp://en.wikipedia.org/wiki/Fortune_Global_500http://en.wikipedia.org/wiki/Daimler_AGhttp://en.wikipedia.org/wiki/Volkswagenhttp://en.wikipedia.org/wiki/Allianzhttp://en.wikipedia.org/wiki/Siemens_AGhttp://en.wikipedia.org/wiki/Deutsche_Bankhttp://en.wikipedia.org/wiki/E.ONhttp://en.wikipedia.org/wiki/Deutsche_Posthttp://en.wikipedia.org/wiki/Deutsche_Posthttp://en.wikipedia.org/wiki/Deutsche_Telekomhttp://en.wikipedia.org/wiki/Metro_AGhttp://en.wikipedia.org/wiki/BASFhttp://en.wikipedia.org/wiki/BASFhttp://en.wikipedia.org/wiki/Metro_AGhttp://en.wikipedia.org/wiki/Deutsche_Telekomhttp://en.wikipedia.org/wiki/Deutsche_Posthttp://en.wikipedia.org/wiki/Deutsche_Posthttp://en.wikipedia.org/wiki/E.ONhttp://en.wikipedia.org/wiki/Deutsche_Bankhttp://en.wikipedia.org/wiki/Siemens_AGhttp://en.wikipedia.org/wiki/Allianzhttp://en.wikipedia.org/wiki/Volkswagenhttp://en.wikipedia.org/wiki/Daimler_AGhttp://en.wikipedia.org/wiki/Fortune_Global_500http://en.wikipedia.org/wiki/Revenue


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percent of its crude oil demand, was imported. Also in 2004, Germany was Europes largestconsumer of electricity; electricity consumption that year totaled 524.6 billion kilowatt-hours.

Services

In 2007 services constituted 69.5 percent of gross domestic product (GDP), and the sectoremployed about 72 percent of the workforce. The subcomponents of services, as a percentageof total economic output, were financial, renting, and business activities (29.5 percent); trade,hotels and restaurants, and transport (18 percent); and other service activities (22 percent).

Tourism

Domestic and international tourism currently accounts for about 3.2 percent of grossdomestic product and 2.8 million jobs. In 2006 Germany ranked seventh in the world ininternational arrivals, with 23.6 million international tourists.

Indicators of Economic Development

Countries vary greatly on the their level of contribution to the global economy, the extent to

which it gets affected by the changes in the global landscape and the amount of growth it can

have in the future-short term and long term. All these depend upon the countrys current level

of economic development. A logical analysis would call for the question: How do we gauge

the economic development of a country? Are there any parameters based on which we can

classify a country as being developed, developing or under-developed. Hence, we

proceed with the discussion, answering these very questions with the help of a set ofeconomic and social indicators which come in handy while tracking the economic

development of Germany.

Indicators

These measures of economic development can be put under four broad heads, each of them

expanding its own list of indicators. (Refer to Exhibit 2.1 for pictorial representation)

(i) Growth

(ii) Development

(iii) Human Development Index

(iv) Other measures

Growth:

We understand Economic Growth as the increase in the amount of the goods and services

produced by an economy over time. The major indicators which contribute to the list are

explained briefly as follows, which are essentially the measures of economic performance in

terms of the value of income, expenditure and output.

(a) Gross Domestic Product (GDP):

The total value of output produced within a country in a given time period. Its value

stands at US $3,607,476.9 millions as on 2008.(Refer to Exhibit 2.2)

(b) Gross National Product (GNP):


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This can be understood as the value of goods and services that the country's citizens produced

regardless of their location.

(c) Real GDP vs. Nominal GDP:

This factor basically explains the existence of differences in price levels across

various countries.(d) National Income:

Though this factor gives us an indication of the development of an economy, there are

a few limitations when it comes to using these factors to assess the level of development, due

to the following reasons

(i) Reliability of data

(ii) Distribution of Income across all sections of the society

(iii) Distorted picture due to influence of exchange rate

(iv) Quality of life- not captured

(v) Black Economy

Its value stands at $38,860 (Source: http://ddp-

ext.worldbank.org/ext/ddpreports/ViewSharedReport?&CF=1&REPORT_ID=9147&REQU

EST_TYPE=VIEWADVANCED&HF=N&WSP=N)

DEVELOPMENT:

We need to emphasize on the fact that economic development is not the same as economic

growth. Economic development incorporates the Human Welfare aspect into it. These are

broadly the indicators which are of great significance.

(a) Poverty Level:

There are basically three current definitions of poverty in common usage: absolute poverty,

relative poverty, and social exclusion.Absolute povertyis defined as the lack of sufficient resources with which to keep body and

soul together.Relative poverty defines income or resources in relation to the average. It deals

more with the absence of the material needs to participate fully in an average life.

Social exclusion is a relatively new term which is being used to describe poverty worldwide.

It has come to be defined as a shorthand label for what can happen when individuals or

areas suffer from a combination of linked problems such as unemployment, poor skills, low

incomes, poor housing, high crime environments, bad health and family breakdown" (Source:

http://www.bbc.co.uk)

The level of poverty in Germany, over the past many years has been captured in Exhibit 2.3.

it can be seen that the level of poverty has been rising.

(b) Economic Inequality:

It comprises of the disparities in the distribution of economic assets and income. This term is

also used when comparing two countries. It is a much debated topic whether it is a positive or

negative phenomenon, both on utilitarian and moral grounds. Refer to Exhibit 2.3 for

indication about its effect on Germany, it shows that there has been an increase in income

inequality over time.

(c) Progress:

There are a lot of factors which contribute to the progress of a country on many fronts, the

goal of which aims at making the man better-off. Progresses in Science and Technology,Business, Human Capital efficiency, other aspects are few to be considered.
http://www.bbc.co.uk/http://www.bbc.co.uk/http://www.bbc.co.uk/


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Human Development Index:

From experience, we see that there are certain limitations with individual indicators in terms

of reliability and consistency. To counter these problems, we find that it is possible to

combine few indicators to form an index of development. This combined index varies from

organization to organization. The UN Development Report used the index of Human

development index. The factors which form the essence of HDI are listed as below.

(a)Life Expectancy ( also termed as Longevity ):

It is the average number of years of life remaining at a given age. It is the average expected

lifespan of an individual.( Steven M. Sheffrin (2003). Economics: Principles in action ) Its

value is 77.3 years for male populations and 82.6 years for female population ( Refer to

Exhibit.2.2)

(b)Literacy rate ( Can be represented as Knowledge):

It is the proportion of the population over age fifteen that can read and write. .( Steven M.Sheffrin (2003). Economics: Principles in action ). Its value stands at 99.9% as on 2008 (

refer to Exhibit.2.2)

(c)Standard of living (captured byPurchasing Power Parity/ GDP per capita):

The standard of living is generally captured by Purchasing power parity, which gives the

information about the real income/person. Germany has a GDP (PPP) of $35,552.

( Source: World Economic Outlook Database-October 2008, International Monetary Fund.)

Overall, Germanys HDI in 2005 was 0.935 and it stood 22nd

in HDI ranking. In terms ofGDP it ranked 20th in the world. This shows that it lags in development as compared to its

growth. But still it fares very well as compared to other countries in terms of this difference.

This is illustrated in Exhibit 2.3. Exhibit 2.4 suggests that HDI of Germany has been

increasing over time (source: hrdstats.undp.org)

Other Measures

(a)Demographic indicators:

We also need to take into consideration few demographic indicators such as Annual

Population growth rate, Urban Population percentage(89%), Percentage of population underthe age of 15 (13.7%) , Infant Mortality rate (3.7%) , which give us insights into the state of

economic development of the country.(Values quoted from Exhibit 2.2)

(b)Disease Indicators:

The extent of diseases spread in many developing countries tells us about the low levels of

health care, expensive drugs, contaminated water supplies, and poor health education. The

factors which we might be interested in are percentage of adult population with HIV/AIDS,

Malaria cases, Tuberculosis cases.

Inter-Relationships between Indicators:


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One important issue which needs to be discussed when discussing the indicators of Economic

Development is the interdependence between indicators. This concept is quite complex, in

the sense that many a time, we cannot be sure of the interdependence. In spite of such a

limitation, we present few relationships which are unmistakable, which we found out from

secondary research.

There is a strong positive correlation between GDP per capita and life expectancy ofa country, however the relation is non-linear. This is can be explained with the logicof practicality. Suppose, there is a slight increase in the wealth of an individual, itraises his basic standard of living, which improves his life span. On the other hand,in developed countries, consider a huge expenditure on advanced medical care, thusincreasing the life expectancy only marginally.

We find that there is a positive correlation between the GDP per head and adultliteracy. We also find that while the degree of correlation is high, it generally is a bit

less (clear) when all the countries are taken into consideration.

Factors Driving Economic Growth in Germany and Factors

contributing to Poor growth

There are several factors which impact Germanys economic growth. Some of the key factors

are listed below.

1) Proposals from the government in March 2003 to reform labour markets andthereafter. There have been a number of proposals that are designed to reduce the sustainablelevel of unemployment using policies toward nonwage labour costs and wage moderation.The German labour market has increasingly suffered from skill mismatches and shortages,resulting in companies in a diverse group of sectors not being able to fill vacancies. After the2002 general elections, the new government merged the labour and economics ministries intoone super-ministry in a move to address more effectively the reform processes needed torevive growth and significantly reduce unemployment. Also, currently a foreign workerrequires a salary of 85,500 to receive a work permit in Germany. The Federal Minister ofEconomics has proposed to cut this threshold in half which would allow Germany to drawskilled workers.

2) Tax policies impact growth significantly. High taxes on wages and corporate profitsreduce the incentives of work and investments and, consequently, growth. Germany hasimplemented rounds of tax reduction to support economic growth. The German trade tax,which primarily accrues to the municipalities, has been degenerated to a tax on the profits oflarge companies. The large increase in value-added tax (VAT) rates from 16% to 19% in2007 did not have a very significant impact though it hit the retail industry. LoweringGermany's average nominal tax rate on businesses from 38.7% to 29.8% from 1st January2008 should improve Germany's investment climate. But the government aims to widen thetax base which is bad news for small and medium sized businesses. A 25% capital gains taxwill also be introduced from January 2009.


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3) The structure of revenues and expenditures influences growth. In principle,expenditures on consumption and direct taxes represent particularly stubborn brakes ongrowth. High taxes on real capital, that is, primarily on company profits, and on the factorwork, have a particularly negative effect.

4) Germanys structural change towards cutting-edge technologies is stumbling. Thiscategory of goods gains ever more importance in world trade, but Germanys respective

foreign trade deficit rose from 1.5% in 1991 to 2.5% in 2001. And even in its traditionalstronghold, the advanced technologies, the foreign trade surplus is dwindling. Germanyscomparative advantage in foreign trade with R&D-intensive goods mainly rests on itsautomobile powerhouses. Dwindling of this segment is not a good sign for the country.

5) The total funds spent domestically on R&D in Germany rose slightly until the year2002 (to 2.52% of GDP). This increase is credited to business only, as the states share on

spending has been on the decline for years. But companies began to reduce their part in 2003-

2004, too .The German governments 3% goal for 2010 (Lisbon agenda) seems hardlyachievable.

6) Germanys market for venture capital has not yet recovered from the setback afterearly 2000 and does not display many signs of doing so soon. Thus, many companies,especially the young and innovative ones lack a main channel of financing.

7) Regulatory burdens on entrepreneurship and business in general are comparativelyhigh in Germany. This includes, but is not limited to, labour market regulation and isempirically backed by the Global Competitiveness Report and OECD (Organisation forEconomic Co-operation and development) studies. For example, the latter found that settingup a company in Germany takes exceptionally long (up to 24 weeks) compared to othercountries like U.K, U.S.A, Japan and France. (Bar Graph attached-Exhibit 3.1)

8) The innovation contribution of German SMEs (Small and Medium Enterprises) is lowand will probably decline further. The share of innovating SMEs fell steadily from 1998 to2002, and SMEs spending on innovation decreased in 2001-2002 (particularly inmanufacturing and distributive services; but a rise in corporate services). For the comingyears, further reductions are expected.

9) Germany has recently become a location of off shoring. Companies such as AMD,

General Electric, Honda, and GlaxoSmithKline have located central research and marketingfunctions in Germany.

10) The share of human resources employed in business R&D, relative to all employees,is high by international standards. This includes not only scientists and engineers, but alsoadministrative and support staff. Germany ranks sixth internationally (2001), followingFinland, Sweden, Denmark, Japan and Belgium.

11) The framework conditions for innovation are rated fifth-best in the world in theGlobal competitiveness Report 2003-2004 by the World Economic Forum. This indicatorincludes the strength of firm clusters and linkage of science and industry, among others.


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12) Germanys triadic patent output (per million inhabitants) ranks fifth worldwide, wellabove the OECD (Organisation for Economic Co-operation and development) mean and theUS output and is still on the rise. In fact, the OECD and US values are stagnating anddeclining, respectively. This is a positive sign for Germany.

13) The supply of highly qualified personnel is bound to decrease, as expectedgraduate/retiree ratios among scientists and engineers as well as other highly qualified areexpected to plummet in coming years.

14) German fiscal policy remains severely constrained by three important issues: The persistent dependence of Germany's eastern regions on major transfers of resources

from federal and regional finance ministries in the west continues to absorb some 4% ofGerman GDP.

The European Commission continues to require that Germany remain the largest netcontributor to the EU (European Union) budget.

The deflationary imperative inherent in the euro-area's Stability and Growth Pact

compounds the German government's fiscal plight.These imperatives are irreconcilable within the framework of the euro-area's current policyarchitecture. They would continue to collide with each other and compound Germany'sgrowth weakness.The country has recently taken steps to combat recession. German officials have unveiled a

31 billion fiscal stimulus package in November 2008 to overcome recession. The

government approved another 50 billion stimulus package in January 2009. The stimulus

plan will not lead to an immediate restoration of economic health. Growth, with the help ofthe fiscal stimulus package, is expected to rebound towards the end of 2009, bringing it into

positive territory in 2010.

15) German Monetary Policy- In the short to medium term, German macroeconomicindicators of output and employment are better under German targeting and active monetary

policy. German output in the short term is much higher when German monetary policy isindependent. However, the longer term benefits are the same irrespective of whetherGermany has an independent monetary policy, and if it still had one it would not be able toreap the significant gains that should be available from a single currency rather than just a setof fixed exchange rates. If the Bundesbank were still running monetary policy in Europe theGerman economy would respond more quickly to the policy change, but in the long run theimpact on output would be the same. However, inflation and hence interest rates tend to behigher in the short to medium term if Germany were in control of monetary policy.

Germany: An Economic History

Wirtschaftswunderzeit: 1945-57

On May 8, 1945 Germany was completely defeated and it unconditionally surrendered to the

four allied powers. As a result of the Yalta conference, and subsequently the Potsdam

conference, it was decided that Germany would be divided among the four Allied powers-the

United States, the Soviet Union, the United Kingdom, and France, and would be administered

jointly from Berlin.


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Due to the difference in objectives, among the Allies and the changed leadership in the US

and the UK, conflicts arose immediately among the allies over the implementation of the

Potsdam agreements.

The French occupation zone included the coal resources of the Saarland, and they wanted to

eventually incorporate Saarland into the French mainland. The Soviets wanted to dismantleGermanys factories to eliminate the threat of renewed armament, and to help replace their

own factories which had been damaged during the war. They proposed placing the

Ruhr(which had the bulk of the factories) under international supervision so that a large part

of its output could be directed to rebuilding efforts outside Germany. The British found the

expenses of maintaining a large standing army and caring for a large refugee population army

to be too high, and hence their policy became one of reconstructing German industry and

rebuilding housing in their zone. The American policy, given by the Morgenthau Plan, was to

dismember Germany politically, to dismantle its factories, and to maintain per capita income

in Germany at the lowest level in Europe. However, they encountered the same problem of

high expenses for maintenance of the refugee population to be too high, and hence the Plan

could never really be carried out.

By September 1946, American policy was converging with British policy and they decided to

combine the operations of their zones from January 1947 as Bizonia. Subsequently, in May

1949, the Federal Republic of Germany was established, which also consisted of the French

zone.

Even though the Allied bombing had destroyed a large amount of capital stock in Germany,

most of the machines in the factories were left undestroyed. Moreover, even during the retreat

of the Germans during the war, the German factory managers were ordered to dismantle their

machines, and not to destroy them, so that they could be used to help in the recovery fromdefeat. In fact, the German capital stock was much larger (in FRG alone) after the war as

compared to before. Moreover, it was readily convertible to the production of civilian goods.

Approximately 11 million individuals had poured into the western occupation zones of

Germany in the ten years after the war. Even though many people had also left Germany, the

overall population of the country had grown by more than 10% between May 1939 and

October 1946. More people had also shifted from the big cities of Berlin and Hamburg to

other rural areas as well. Moreover, the new population was predominantly filled with people

who were well educated and at prime working ages. There were a large number of

immigrants, who were highly motivated to work hard and save stringently in order to restore

their material location quickly. Hence, the excess capacity of the German manufacturing

plant could be staffed immediately by new workers eager for employment and easily trained.

The US aid to UK and France also removed any claims that they had on West Germanys

industrial plants for reparations.

In June 1948, currency reforms took place and Deutsche mark was introduced. The

occupation currency used until then, the Reichmarks quickly depreciated as there was no

central control over the amount issued. The new currency was issued and was monitored by

the central bank of Bizonia, Bank Deutscher Lander. Subsequently, France also joined in the

same currency. The exchange ratio for Reischmarks to Deutsche marks was 1:10. This meant

that the money supply drastically reduced by around 90%. Holders of money were wiped out,while people who owned physical assets were greatly benefited.


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Price controls were removed in most commodities and this lead to a surge in their prices. This

encouraged dishoarding by merchants and also increased the revenue of the government. This

allowed both the demand and supply to rise quickly without running into any constraints.

Though the demand within Germany was primarily for scarce consumer goods, the West

German economy had a well developed manufacturing sector that was well suited forproducer goods, which were in high demand in other parts of war-torn Europe. Hence the

West German economy was highly export oriented.

All these factors lead to a good level of growth for Germany in the period following the

Second World War.

Slowing Down: 1958-73

In 1961, the Berlin Wall was erected to compete the closure of the border of East and West

Germany and to stop the flow of refugees, which it successfully did.

This lead to a shortage in the availability of labour. In order to overcome this problem, the

West German industry responded by initiating the Gasterbeiter (guest worker) program whichwas a huge success.

The West German capital stock also continued to grow, mainly due to direct investment by

British and American firms. Due to a high common external tariff within Europe, the

companies wanted a base in Europe from where they could export to the rest of the countries

in the area.

The guest workers were mainly recruited from Spain, Yugoslavia and Turkey. Turkey

especially had a large and growing population and was able to supply a large number of

workers. Moreover, since the German workers were better skilled and educated, they got

superior jobs as compared to the temporary workers, who got the low level jobs. This ensuredthat there was no resentment amongst the workers in Germany.

West German firms continued to be highly competitive in the export markets, mainly thanks

to their low costs of production due to cheap labour. The tight monetary policy of the

Bundesbank, combined with fixed exchange rates of the deutsche mark with the other

currencies of its trading partners, meant that the real exchange rate of the deutsche mark kept

falling, making German goods more competitive.

However, the rate of investment in West Germany slowed down, mainly due to a slowdown

in the growth of the export markets. Investments that were made during the period were

mainly to make use of the cheap availability of labour, and not to develop superior stocks of

capital. There was also a demand supply gap for high skilled workers in certain sectors due to

fixed quotas of workers in each domain under the apprenticeship program.

The three oil shocks: 1974-85

The Bundesbank had always been committed to ensuring price stability in the country. Till

1971, a system of fixed exchange rates was followed and the central bank was bound by the

policy to ensure that the exchange rates did not change.

However, once the fixed exchange rate regime collapsed in 1971, the nominal exchange rate

of the deutsche mark rose sharply relative to most of its trading partners. This in turn meant

that German exports became more expensive.


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In order to remain competitive, the exporters had to either lower their prices or raise the

quality of their product relative to other countries. One of the ways in which they improved

quality was by setting up entire turnkey factories in developing countries trying to build up

a modern manufacturing sector from scratch. The factories would be fully setup and ready to

use directly. In return, the buyer of the factory would enter into long term contracts fordelivering intermediate products to the West German exporter for a number of years at fixed

below market prices. A number of such contracts were made with Iran as well. Hence, when

the first oil shock happened in October 1973, they were able to get oil at previously decided

low prices. Moreover, the deutsche mark also continued to appreciate against other

currencies. These two factors helped Germany weather the effects of the first oil shock better

than other countries.

However, the overall European economy had slowed down and this lead to a reduction in

demand for German exports. Unemployment started to rise, and there were increasing

demands from workers to send the guest workers back to their home countries. However, this

was not very easy as many of them had already become eligible for emigration, which meant

that should they be laid off, they would be entitled to unemployment benefits.

In 1978/79, OPEC oil ministers doubled the price of oil again, and this lead to a further

increase in unemployment. The dollar also began to strengthen against other currencies and

this further made oil costlier for other countries.

The German economy had been able to establish itself as one of the foremost economies of

Europe, thanks to three key institutions that differentiated them from the rest of Europe

1. Co-Determination principle

All companies had representatives from the labour unions and general public on their

board of directors. The presence of workers on the board ensured that their wage

demands were moderate and allowed the companies to grow by investing more money

into the business. However, this caused a problem during the oil crisis as it became

really difficult for companies to lay off or downsize to maintain competitiveness in

the industry.

2. Elaborate Apprentice Program

This was an elaborate training program conducted by the central, state and local

government along with corporate businesses. This ensured that the level of human

capital in the West German economy did not go down. This allowed businesses accessto entry level workers who could be hired at cheaper rates while they were

apprentices. If they were found suitable on completion of the apprenticeship, they

could be hired full time. However, this system was highly inflexible, and lead to a

shortage of jobs for apprentices in slow growing industries while there was a lack of

workers in some other fast growing industries.

3. Relationship between banks and corporate

Banks were allowed to own an equity stake in companies to which they lent money.

Being privy to management decisions allowed banks to make better decisions

regarding the profitability of any investment. However, in case of a bad business


14/35


decision, the bank itself becomes hostage to its own actions as it was a part of the

decision making process.

To sum up, these institutions which had helped Germany to grow at phenomenal rates till the

early 1970s failed to meet the challenges of the 80s and the 90s. The only way for Germany

to continue to grow was to expand its exports and to further dominate in the Europeanmarkets.

Single Unified Market: 1986-90

In 1986, a number of events occurred which helped reinvigorate the West German economy.

The expansion of the European Economic Community to include Spain and Portugal lead to a

large level of foreign investment from American, Japanese and European firms to try and

capitalize on their low wage costs. All of these investments required construction equipment

and machines, which were the strongest exports of Germany. The third oil shock lowered the

price of imported oil. Moreover, the US government was also committed to a weakening of

the dollar. The currencies of other European nations also strengthened and this created auniform single market in Europe.

However, despite this expansion, the unemployment rates in Germany did not decrease.

Economists have attributed this to the hysteresis effect of unemployment, which basically

says that once workers are used to generous unemployment benefits, refuse to take up new

jobs unless it comes with higher wages. With time, they become less and less attractive to

employers as their skills stagnate and eventually they become obsolete.

The GATT negotiations were being held to try and discuss the lowering of non-tariff barriers

in the EEC on trade with the rest of the world. Germany had become highly dependent on

these barriers for its success. There were many sectors where non-tariff barriers did not letvery cheap foreign commodities to be imported into the country. For example, coal which

was produced at $100 a ton to maintain employment for coal miners and electric power plants

and steel mills was subsidized for using it rather than being able to buy American coal for

$10 a ton.

The Reunification Shock, 1990 onwards

On 3rd October 1990, East Germany united with West Germany. The first manifestation of

the shock was the huge influx of young East Germans into West Berlin and into West

Germany, who were keen to work and help in continuing the economic expansion that was

taking place there. However, there was the threat of there being too many workers leading tothe problem of unemployment, similar to the one caused by excess guest workers in the late

70s and early 80s.

The key to solving the dilemma was to invest in East Germany itself. The German Economic

and Monetary Union of July 1990 implemented this strategy.

Upon adoption of the deutsche Markin East Germany on 1 July 1990, the East German

mark(ostmark) was converted at par for wages, prices and basic savings (up to a limit of 4000

Mark per person, except for children (less) and pensioners (more)). Larger amounts of

savings, company debts and housing loans were converted at a 2:1 rate. This inflated

exchange rate ensured that East Germans stayed put in their houses, and did not try to migrate


15/35


to West Germany. East Germany was a large new domestic market for West German firms

who could now make higher profits through increased demand.

The exceptionally high exchange rate also put the contractual wages of East German workers

well above their productive levels thereby increasing unemployment. It also decreased the

attractiveness of East German enterprises to foreign investors. It also made it difficult forEast German firms to get financing because it took them at least 2 ostmarks worth of assets to

get 1 deutsche mark worth of loan.

This lead to a turnaround of the German trade account, which changed from one of healthy

surplus in the late 1980s to one of deficit in the early 1990s.

The fiscal prudence that had helped West Germany attain respectable levels of debt in the

1980s now seemed to be fading into the past as a result of the costs of reunification.

The lack of private investment in East Germany, despite heavy government expenditure on

public infrastructure in East Germany keeps unemployment high there. The continued extra

reunification tax levied on West German individuals keeps unemployment high there as

well.

However, German efforts to improve the East German infrastructure seem be finally paying

off with a resumption in growth in German exports.

(Source: The Economics of Europe and European Union, By Larry Neal, First Edition, 2007)

Country Risk AssessmentRisk Assessment

Refer to Exhibit 5.1 for the year-wise details of the indicators discussed below. (Data Source:

2004, International Monetary Fund: International Financial Statistics Yearbook)

Exchange Rate

Prior to January 1999, the market rate was obtained from the Frankfurt foreign exchange

market. In January 1999, the deutsche mark became a participatory currency in Eurosystem

and euro market rates became applicable to all transactions.

It can be seen that deutsche mark was appreciated from 2.021in 1992 to 1.97 in 1998, with

respect to US Dollar.

International Liquidity

It can be seen that the reserve of US Dollar has decreased substantially from USD 85887

millions in 1992 to USD 41095 millions in 2003. This indicates the growing importance of

euro, at least in the euro zone.

Interest Rate

It can be seen that Germany had very high interest rates (13%) in 1992, but they have been

decreasing since then and came down to low levels (9%) by 2003.


16/35


Balance of Payment

From 1992, Current Account has been in deficit with fluctuating but reducing numbers. This

continued till 2000 after which it turned to surplus and increased rapidly to USD 53.1 billion

by 2003.

Trade balance has been positive and increasing from USD 28.2 billion in 1992 to USD149.37 billion in 2003.

Capital account has not been significant but has been mostly in deficit.

International Investment Position

Germany has substantial investments done abroad. Direct Investments abroad have increased

from USD 148.46 billion in 1992 to USD 645.95 billion in 2002. Also, institutional

investments abroad have increased from USD 246.49 billion in 1992 to USD 1087.56 billion.

There has also been substantial foreign investment. Foreign Direct Investments increased

from USD 75.48 billion in 1992 to USD 510.32 billion in 2002. Foreign Institutional

Investments have increased from USD 362.07 billion in 1992 to USD 1250.82 billion in

2002.

Government Finance

Total debt as percentage of GDP has been increasing in Germany. Domestic debt has

increased from 25.41% of GDP in 1992 to 39.40% of GDP in 1999. Similarly, Domestic debt

has increased from 25.41% of GDP in 1992 to 18.62% of GDP in 1999. Foreign debt i.e.

external debt has also been increasing from 9.44% of GDP in 1992 to 20.42% of GDP in

1999.It is also to be noted that Germany has no debt outstanding from IMF since 1984

(www.imf.org).

National Account

Export of goods and services increased from 24.5% of GDP in 1992 to 35.7% of GDP in

2003. Imports of goods and services also increased from 24.7% of the GDP in 1992 to 31.5%

of GDP in 2003. In 2008, exports were 42.8% of GDP while imports were 34.8% of GDP.

This shows an increasing trend.

Germany A Competitive Analysis

Refer to Exhibit 5.2 and 5.3 for the details of the competitive indices. (Data Source: World

Economic Forum)

Germany ranks seventh in the global competitive index in 2007-08. This indicates that it is

the seventh best country in the world to set up a business. Germany had a huge competitive

advantage in terms of its infrastructure, in which it ranks first. Also, it fares the best in

competitive markets and prevention of monopolies. It also fares the best in terms of

innovation in 2007-08. But, it has got serious disadvantages in terms of Macroeconomic

stability, education and labour flexibility.
http://www.imf.org/http://www.imf.org/http://www.imf.org/http://www.imf.org/


17/35


Overall, Germany fares well in terms of time required to setup business and procedures

involved in the same. Thus, Germany seems to be a good place for investment.

Exhibits

Note that sources of the exhibits have been given in the text of the report


18/35


Exhibits 1.1, 1.2, 1.3


19/35


Exhibits 1.4, 1.5, 1.6

Exhibit 2.1 Measures contributing to the Indicators of Economic Development

Indicators of

Economic

Develo ment

HUMAN

DEVELOPMENT

INDEX

OTHER

MEASURESGROWTH

DEVELOPMENT


20/35


Exhibit 2.2 Statistical Summary of important parameters of Germany across the past fiveyears

Exhibit 2.3


21/35


Exhibit 2.3

Exhibit 2.4


22/35


Exhibit 2.5

Year GDP Real Growth (%) LEI - Male (year) LEI - Female ( years) Adult Literacy (%)

2003 -0.2 75.8 81.3 99.9

2004 1.2 76.5 81.6 99.9

2005 0.8 76.7 81.8 99.9

2006 3 76.5 82 99.9

2007 2.5 77.1 82.4 99.9

2008 1.3 77.3 82.6 99.9


23/35


Exhibit 2.6

Exhibit 2.7


24/35


Exhibit 2.8

Exhibit 2.9


25/35


Exhibit 3.1


26/35


Exhibit 5.1

i

-

i

it

1992

1993

1994

1995

1996

1

997

1998

1999

2000

2001

2002

2003

Excha

ngeRates

MarketRate

DeutcheMarkperUSDollar

till1998,thereafterEuros

perUSDollar

2.021

1.93

1.92

1.87

1.9

1.96

1.97-

-

-

-

-

Intern

ational

ii

t

ForeignExchange

MillionsofUSDollars

85887

72727

72219

77794

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2.69

2.88

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3.56

2.65-

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13.59

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11.48

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636.9

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504.03

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758.67

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297.83

405.77

393.62

527.54

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BillionsDeutcheMarktill

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stRate

%perannum

Balanceof

Payment

BilionsofUSDollar,-vesign

meansdebit

Government

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inance

%ofGDP

Intern

ational

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ment

Position

BillionsofUSDollars

BillionsDeutcheMarktill

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r


27/35


Exhibit 5.2

Index Rank

Global Competitiveness Index 2008-2009 7

Basic requirements SubIndex 7

Institutions 14

A. Public institutions 14

1.01 Property rights 6 A

1.02 Intellectual property protection 6 A

1.03 Diversion of public funds 13 D1.04 Public trust of politicians 21 D

1.05 Judicial independence 4 A

1.06 Favoritism in decisions of government officials 11 D

1.07 Wastefulness of government spending 27 D

1.08 Burden of government regulation 77 D

1.09 Efficiency of legal framework 4 A

1.1 Transparency of government policymaking 22 D

1.11 Business costs of terrorism 62 D

1.12 Business costs of crime and violence 19 D

1.13 Organized crime 31 D

1.14 Reliability of police services 4 A

B. Private institutions 13

1. Corporate ethics 15 D

1.15 Ethical behavior of firms 15 D

2. Accountability 9 A1.16 Strength of auditing and reporting standards 14 D

1.17 Efficacy of corporate boards 13 D

1.18 Protection of minority shareholders interests 5 A

Infrastructure 1

2.01 Quality of overall infrastructure 3 A

2.02 Quality of roads 4 A

2.03 Quality of railroad infrastructure 4 A

2.04 Quality of port infrastructure 4 A

2.05 Quality of air transport infrastructure 3 A

2.06 Available seat kilometers* 5 A

2.07 Quality of electricity supply 8 A

2.08 Telephone lines* 2 A

Macroeconomic stability 40

3.01 Government surplus/deficit* 58 D

3.02 National savings rate* 60 D3.03 Inflation* 32 D

3.04 Interest rate spread* 10 A

3.05 Government debt* 105 D

Health and primary education 24

A. Health 14

4.01 Business impact of malaria 16 D

4.02 Malaria incidence* 1 A

4.03 Business impact of tuberculosis 23 D

4.04 Tuberculosis incidence* 8 A

4.05 Business impact of HIV/AIDS 16 D

4.06 HIV prevalence* 23 D

4.07 Infant mortality* 10 A

4.08 Life expectancy* 12 D

B. Primary education 28

4.09 Quality of primary education 36 D4.1 Primary enrollment* 17 D

4.11 Education expenditure* 52 D

Efficiency enhancers SubIndex 11

Higher education and training 21

A. Quantity of education 35

5.01 Secondary enrollment* 25 D

5.02 Tertiary enrollment* 43 D

B. Quality of education 29

5.03 Quality of the educational system 23 D

5.04 Quality of math and science education 44 D

5.05 Quality of management schools 21 D

5.06 Internet access in schools 30 D

C. On-the-job training 8

5.07 Local availability of research and training services 5 A

5.08 Extent of staff training 12 D


28/35


Exhibit 5.2 (conti.)

Goods market efficiency 15

A. Competition 16

6.01 Intensity of local competition 1 A

6.02 Extent of market dominance 1 A

6.03 Effectiveness of anti-monopoly policy2 A

6.04 Extent and effect of taxation 105 D

6.06 No. of procedures required to start a business* 58 D

6.07 Time required to start a business* 38 D

6.08 Agricultural policy costs 84 D

6.05 Total tax rate* 89 D

6.09 Prevalence of trade barriers 31 D

6.11 Prevalence of foreign ownership 31 D

6.12 Business impact of rules on FDI 46 D

6.13 Burden of customs procedures 21 D

10.04 Imports* 77 D

6.1 Trade-weighted tariff rate* 5 A

B. Quality of demand conditions14

6.14 Degree of customer orientation 14 D

6.15 Buyer sophistication 16 D

Labor market efficiency 58

A. Flexibility 122

7.01 Cooperation in labor-employer relations 27 D

7.05 Hiring and firing practices 130 D

7.02 Flexibility of wage determination 131 D

7.06 Firing costs* 93 D

7.04 Rigidity of employment* 87 D

7.03 Non-wage labor costs* 80 D

B. Efficient use of talent 12

7.07 Pay and productivity51 D

7.08 Reliance on professional management 9 A

7.09 Brain drain 26 D

7.1 Female participation in labor force* 34 D

Financial market sophistication 19

A. Efficiency 27

8.01 Financial market sophistication 14 D

8.02 Financing through local equity market 50 D

8.03 Ease of access to loans 46 D

8.04 Venture capital availability 33 D

8.05 Restriction on capital flows 8 A

8.06 Strength of investor protection* 67 D

B. Trustworthiness and confidence11

8.08 Regulation of securities exchanges 15 D

8.07 Soundness of banks 39 D

8.09 Legal rights index* 8 A

Technological readiness 18

9.01 Availability of latest technologies 8 A

9.02 Firm-level technology absorption 12 D

9.03 Laws relating to ICT 13 D

9.04 FDI and technology transfer 61 D

9.05 Mobile telephone subscribers* 26 D

9.06 Internet users* 30 D

9.07 Personal computers* 12 D

9.08 Broadband Internet subscribers*23 D


29/35


Exhibit 5.2 (conti.)

Exhibit 5.3

Market size 4

A. Domestic market size 5

10.01 Domestic market size* 5 A

B. Foreign market size3

10.02 Foreign market size* 3 A

Innovation and sophistication factors SubIndex 4

Business sophistication 1

A. Networks and supporting industries 2

11.01 Local supplier quantity 2 A

11.02 Local supplier quality 2 A

11.03 State of cluster development 10 A

B. Sophistication of firms' operations and strategy 1

11.04 Nature of competitive advantage 1 A

11.05 Value chain breadth 4 A

11.06 Control of international distribution 2 A

11.07 Production process sophistication 3 A

11.08 Extent of marketing 4 A

11.09 Willingness to delegate authority 10 A

Innovation 8

12.01 Capacity for innovation 1 A

12.02 Quality of scientific research institutions 6 A

12.03 Company spending on R&D 5 A

12.04 University-industry research collaboration 6 A

12.05 Gov't procurement of advanced tech products 34 D

12.06 Availability of scientists and engineers 26 D

12.07 Utility patents*

Best Performing Countries/Economies

Infrastructure Germany

Intensity of local competition Germany

Extent of market dominance Germany

Business sophistication Germany

Sophistication of firms' operations and strategy Germany

Nature of competitive advantage Germany

Capacity for innovation Germany


30/35


Exhibit 5.4

Exhibit 5.5


31/35


Exhibit 5.6

Exhibit 5.7


32/35


Exhibit 5.8

Exhibit 5.9


33/35


Exhibit 5.10

Exhibit 5.11


34/35


Exhibit 5.12


35/35

References

1. http://hdrstats.undp.org/countries/country_fact_sheets/cty_fs_DEU.html

2. http://www.portal.euromonitor.com/

3. http://www.weforum.org/

4. The Economics of Europe and European Union, By Larry Neal, First Edition, 2007

5. http://ddp-

ext.worldbank.org/ext/ddpreports/ViewSharedReport?&CF=1&REPORT_ID=9147

&REQUEST_TYPE=VIEWADVANCED&HF=N&WSP=N

6. http://www.bbc.co.uk

7. http://userpage.chemie.fu-berlin.de/adressen/brd.html

8. Http://www.economywatch.com/world_economy/germany/

9. http://www.econstats.com/index.htm

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664.aspx

11.http://www.industryweek.com/articles/german_industrial_slump_stuns_analysts_18

664.aspx

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13.Current Issues-More Growth for Germany Deutsche Bank Research Report,

June 22, 2004

14.Wage Moderation Policy In Germany -Ray Barrell, Bettina Becker and Sylvia

Gottschalk, NIESR, 17th November 2003

15.Frankfurt Voice-More growth for Germany Deutsche Bank Research Report,

December 23, 2002

16.Germany business environment: Europe's economic powerhouse re-emerges,

Euro monitor International, 13 July 200717.In shoring to Germany Global networking is not a one-way street- Deutsche Bank

Research Report, April 20, 2006

18.International Monetary Fund, International Financial Statistics, Yearbook 2004.

19.Steven M. Sheffrin (2003). Economics: Principles in action

20.World Economic Outlook Database-October 2008, International Monetary Fund.

21.www.imf.org
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