Trust and Germany's Economy

Table of Contents

List of Tables

1 Preface

2 Trust and Cooperation

3 Germany’s economy
3.1 Germany’s socio-economic conditions
3.2 Inside Deutschland AG
3.3 Changes in economy and policy
3.3.1 A model challenged
3.3.2 East and West
3.3.3 Globalization

4 Conclusion and Outlook

5 References

List of Tables

Table 1: Analysis of capital control in German companies

Table 2: Proportions of capital investments in international and historical comparison

1 Preface

“Social capital can be defined simply as the existence of a certain set of informal values or norms shared among members of a group that permit cooperation among them."

Francis Fukuyama

When economic and political negotiation is embedded in dense networks of social interaction, incentives for opportunism are reduced. Dense networks of interaction probably broaden the participants' sense of self, developing the "I" into the "we".

Robert D. Putnam

When we talk about the idea of European local productions systems that exist, the differences in social cohesion and cooperation among European regions might be interesting. This idea has been examined by scientists for a couple of years, now. Trust and the development of cooperation have been studied by behavioural as well as social and political scientists.

In 1993, after the Communist Block in Eastern Europe collapsed, Francis Fukuyama published his book “Trust” where he examines trust and social capital as an economic factor in the industrialized and industrializing nations.

A large part of his book is dedicated to the success of Germany’s economy. Fukuyama refers to the successful cooperation of horizontally (e.g. inter-capitalistic) and vertically interdependent agents (e.g. shop-owners and their employees). Indeed, the cooperation of business owners, or their managers, with their employees can be described as unique among large industrialized nations. Nevertheless, the “Mitbestimmung”-legislation (codetermination) and the “Deutschland AG” (Germany Inc.) conglomerate have been the object of severe criticism during the last decade. Attempts were made in order to cut back inter-firm dependencies and union-involvement in the German industry. With the latest scandal in the Volkswagen AG the “German Trust Model” seems to become a “lame duck”^[1].

In this essay it will be focused on the interdependencies of firms and investors, and the role trust and social cohesion play in today’s German economy. Fukuyama’s thesis will be compared to the reality of German or Rhenish capitalism. Financial interdependencies and cooperation among Germany’s companies will be examined and it will be asked if they have changed during the last decades.

2 Trust and Cooperation

Fukuyama describes the end of history with the collapse of communism in Eastern Europe. With the downfall of this last totalitarian experiment it became obvious that only the “Civil Society” is able to foster prosperity and thus is essential to our economic life. Differences between prospering and under-performing nations would not be observed between civilizations^[2]. Indeed, wealth and prosperity are conditioned by a single, pervasive cultural characteristic: the level of trust inherent in the society.

Fukuyama^[3] argues that the neoclassical economic theory explains only up to 80% extent of the economic events, the rest depends on the role of the state and of the social organizations a society has. Hence, trust is the outcome of shared values developed in social groups.

He describes the advantages of high trust inherent in a society as following: There are lower administration costs and a higher institutional reliability because people feel responsible for their fellow citizens. High-trust societies provide many large and efficient organizations because owners and members are willing to delegate power and control. Whereas disadvantages of low trust in a society are corruption and trade with influences because people do not feel responsible for their fellow citizens. There can only be found small and inefficient organizations because owners and members distrust in delegation.

Fukuyama formulates two options how a country’s culture tells us something about its industrial structure. The first option determines that societies with weak bonds of trust tend to be dominated by small, family-owned businesses. The second option is that societies with vigorous private non-profit organizations (high-trust societies) are also likely to develop strong private economic institutions that go beyond the family.^[4]

Societies that are institution-centred with strong social ties are Japan, Germany, and the USA. They all have common characteristics, e.g. they have customs to extend the trust beyond the limits of the family and there are large companies with the involvement of non-family members at high positions. In all three nations exists an extensive civil society and there are strong bounds between group members.^[5]

The existence of large corporations in the USA, Germany and Japan is based on the same reasons. Each culture had certain characteristics that allowed business to grow beyond family-ownership and to create organizations that were not based on kinship. There was a high degree of trust within the societies and between individuals who were not related to one another. This was a solid basis for social capital.

Robert Putnam^[6] described the role of trust and the civil society in his work “Making Democracy Work” where he concludes that voluntary action and cooperation is easier in communities that have inherited a substantial stock of social capital. He argues that spontaneous cooperation is facilitated by social capital and thus helps to reduce the input of physical capital. Hence, social capital (trust, norms, and networks) is ordinarily a public good. Yet, like all public goods it tends to be under supplied by private agents. Trust is usually produced in small amounts though it could be “produced” as a by-product of other social activities. Social norms transfer the right to control an action from the actor to others, typically because that action has “externalities”. Norms are inculcated and sustained by modelling, socialization, and by sanctions; they evolve because they lower transaction costs and facilitate cooperation. Any generalized reciprocity refers to a continuing relationship of exchange and that involves mutual expectations. An effective norm of generalized reciprocity is likely to be associated with dense networks of social exchange and a vertical network can not so easily generate trust and cooperation.

For James Coleman social capital is the ability of people to work together for common purposes in groups and organizations. Coleman defined social capital by its function as a variety of entities with two elements in common: They all consist of some aspect of social structures, and they facilitate certain action of actors whether persons or corporate actors within the structure^[7].

Schupp and Wagner^[8] propose a practical approach of trust in measuring trust in the German society at the beginning of the 21st century. In a socio-economic panel data examination they interviewed n=850 in 2003. 86% of the interviewed persons have “very much” trust into their families, while only 50% have that much trust into their friends. Though, 93 % have „much“ or „very much“ trust into their friends. Almost three quarters have the same level of trust into their neighbours. If we consider East and West, only 61% of East but 72% of West Germans trust their neighbours „much“ or „very much“. Germans have only little trust towards strangers, they meet for the first time i.e. only every eight has trust but a quarter stated they do not trust them.

It is quite surprising that Germans only have little trust into trade unions and companies. Only a fifth has trust into these institutions. East Germans are even more sceptic against companies and West Germans have less trust into trade unions.

Only 20% trust the German Bundestag (parliament), again Easterners have less trust into this important political institution. 35% of the interviewed persons have trust into churches. Yet, 70% trust the police and the proportion of those who do not trust this institution at all is quite low.

It seems that the level of trust into institutions is not that high as we might suggest after reading Fukuyama’s arguments. Nevertheless, it is very interesting to examine how far Germany’s economy is influenced by social cohesion and how this might be subject to change.

3 Germany’s economy

Germany is often called a miraculous economy because it developed its extraordinary strength after a devastating defeat in World War II. There are several explanations for this phenomenon:

Firstly, Wolfgang Streeck describes Germany’s economy as the “German model” of advanced capitalism. An “institutionalized high-wage economy combining high competitiveness in world markets with strong social cohesion and, in particular, low levels of inequality along a variety of dimensions. This combination is explained by a unique set of socio-economic institutions, in particular socially instituted and circumscribed markets, negotiated firms commanding long-term attachment of both labour and capital, a facilitating state relying mainly on indirect means of intervention, widespread associational self-governance by organized groups in civil society, and institutionalized cultural patterns that promote long-term commitments and continuity.^[9] ”

[...]

^[1] Internet Source a): manager-magazin.de : Volkswagen-Affäre - Scharfe Kritik an Piech.

^[2] Compare Huntington’s thesis about the „Clash of Civilizations“.

^[3] Fukuyama (1993)

^[4] Fukuyama (1993): 49

^[5] Fukuyama (1993): 50 ff.

^[6] Putnam (1995)

^[7] Coleman (1988), S98 cited after Portes (1998): 5

^[8] Internet reference b) Schupp/Wagner (2004) - Vertrauen in Deutschland: Großes Misstrauen gegenüber Institutionen

^[9] Streeck (1995): 1 ff.