London School of Economics

March 2002

Essay II

The German model in the face of globalization

by

Ralf Segeth

The assumption that the developed economies are currently undergoing profound changes sparked by a technological ′revolution′ and fueled by broad liberalization in the international economy is no longer seriously debated. Where opinions diverge is on the effect this process, commonly referred to as globalization, has on the different models of capitalism. A widely held view is that of eventual convergence under the influence of similar pressures. Proponents of this perspective usually further argue that coordinated market economies (CMEs) will be the victims of this convergence as the model of capitalism fitter for survival is that of liberal market economies (LMEs).

This essay will argue, however, that the German system, as an example of a CME, will remain distinct from the US/UK model, as examples of LMEs, for the foreseeable future. This is indeed to a great extent due to what Soskice (1999) calls the "interlocking complementarities between the different parts of the institutional framework". But other factors, such as firms themselves exploiting institutional comparative advantages, institutions acting as shapers as well as takers of change, and explicit political choices also play a decisive role.

One of the main arguments of the varieties of capitalism-approach is that institutions matter, i.e. that both CMEs as well as LMEs have an institutional backup (Kitschelt et al. 1999). In the case of LMEs, most of these are found to be rather weak and some of them even non-existent. The main institution on which the model is based is thus the market, or rather the various markets for labour, products, corporate governance, capital etc. Information asymmetries between management on one side and owners, workers, unions, customers and competitors on the other are resolved through these respective markets. Little to no non-market coordination takes place (Hall and Soskice 2001).

CMEs, by contrast, are characterized by a whole array of institutions other than markets on which they rely for their functioning. Labor laws, for example, establish various co-determination mechanisms through which workers are involved in company matters, such as works councils and board membership. Moreover, employers are bound into employer associations and mandatory membership of chambers of commerce. This, in turn, allows them to operate a formal, well-organized training system and to engage in industry-wide wage bargaining with the unions. Corporate governance regulations often encourage extensive cross-shareholdings and permit banks to act as part-owners as well as lenders. In CMEs, information asymmetries are therefore dealt with mostly through non-market coordination mechanisms and institutions (Hall and Soskice 2001).

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