The German Model in the face of globalization

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 nonmarket 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).

It should be noted further that institutions not only play an important role each of them individually, but, above all, collectively. That is, both LMEs and CMEs have to be seen as systems, the different elements of which form what could be called an institutional equilibrium. Soskice (1999), for example, argues that there exist “strong complementarities between (the) different components” of the system. In other words, this means that “institutions do not stand alone but depend for their good functioning on inputs that other parts of the system provide” (Berger 1996). Thus, the extensive vocational training in Germany, for example, depends on coordinated wage setting to prevent poaching of workers. Both of these, in turn, require the capacity of employers to cooperate. In fact, the coordination between companies is often regarded as the main explanatory variable for the functioning of the two main capitalist models (Soskice 1999). In terms of the topic of this paper, it is the backbone of the German model, the mechanism that enables and underlies all the other institutions.

Wood (2001) then points out that not only do the various features of non-market coordination in a CME allow for a “quality-based competitive strategy employing incremental innovation”, but at the same time this ‘diversified quality production’ (DQP) necessitates nonmarket coordination and the institutions connected thereto to be sustainable. High skilled workers and long-term finance, for example, are essential inputs in a CME-type production regime. In this sense, the system can easily be seen to have clear self-reinforcing tendencies.

All this is obviously in stark contrast to the dynamics in an LME model, where most of the aforementioned institutions are absent, arguably to a great extent due to the lack of employer coordination. Ultimately, this leads to company strategies based more on cost advantages and radical innovation (Wood 2001, Soskice 1999). Nonetheless, the system in itself is not any less stable than a CME. In fact, the opposite could well be argued, since an LME is in many ways a much more ‘simple’ model requiring far less non-market coordination inputs and institutions. The question here is, however, more concerned with the future stability and sustainability of CMEs, and with the German model in particular.