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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
To link to this article: DOI: 10.1080/13662719700000001
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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
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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.
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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.
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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
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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
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(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.
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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-
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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
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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.
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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.
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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.
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TH EGERMAN ODEL IN T H E 1990s 13
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