Ifo Viewpoint No. 57: The Export Puzzle

Hans-Werner Sinn
Munich, 10 November 2004

The world economy is growing at a brisk 5% in 2004, the highest rate in 28 years. And yet German economic growth continues to be sluggish, keeping the labour market in a state of crisis. Consumption and particularly investment are weak. The German economy lacks the dynamism of previous upswings.

German exports are being towed along by the world economy's fast-growing investments. Exports will rise about 10% this year, enabling Germany to defend its title as the world's second largest exporter. Still, the German economic research institutes expect GDP to grow by only 1.8% in 2004 and 1.5% in 2005. Germany thus continues to rank amongst Europe's economic laggards.

The German economy poses a puzzle. Why is it that the enormous surge in external demand for German products in 2004, which surpassed everything Mr Eichel even with the boldest debt policy would have dreamt of achieving, did not bring about higher economic growth? Why are both the labour market and domestic demand so sluggish in the face of booming exports?

The answer is that German export companies are competitive, but German workers are not. While companies, as legal entities and brand bearers, can safeguard their competitiveness by producing a steadily increasing share of their primary product chain in low-wage countries, a significant portion of the German workers have already lost their competitiveness. That is the bazaar economy view.* Industrial value-added, employment, earned income and thereby private consumption are increasingly uncoupled from industrial production. Workers fretting about their jobs do not dare to incur greater expenses, and companies do not have the nerve to invest in German jobs in the face of ever keener low-wage competition from abroad. If an investment is to be made, the low-wage eastern countries lying on Germany's doorstep come into consideration.

The high German export surplus is, by definition, a capital export. As such, it is also an indicator for job exports to other countries. According to the German Central Bank's statistics on direct investment, no less than 4 million jobs have already been created abroad by German companies, without considering the many jobs created by German financial investment abroad.

It is true that the industrial value added increases with exports and gives a positive impetus to the German economy, but the growing disengagement between the creation of value added and industrial production lessens the force of this thrust. This disengagement can be observed in many countries, but in Germany it is taking place faster than in other European countries; indeed, from an economic standpoint it is proceeding much too quickly. Industrial employment is decreasing without sufficient jobs being created in the services sector to absorb the manpower set free. A process which in principle can be regarded as a signal for improvement of the international division of labour is excessive in Germany. While no less than 1.9 billion manhours were lost in the productive sector (not including construction) between 1995 and 2003, merely 290 million hours were created during this period in the entire rest of the economy. The net loss amounted to 1.61 billion man-hours. The workers did not emigrate from industry to the other sectors of the economy, but to the welfare state.

The responsibility for this lies essentially in the rigidity of wages for low-skilled jobs, which in turn results from the collective bargaining law and the wage competition resulting from the replacement incomes the Welfare State is paying. Simple industrial work in Germany is uncompetitive because it is too expensive. Labour costs per hour in Germany are higher than practically anywhere else. They exceed even the Swedish ones by a third. As long as this problem remains unsolved, exports will not be able to stimulate Germany's domestic economic activity.

Hans-Werner Sinn
Professor of Economics and Public Finance
President of the Ifo Institute

Published under the heading "Das Exporträtsel", Süddeutsche Zeitung, October 29, 2004, p. 24.

*See Ifo Viewpoint 50, January 8, 2004, „The Bazaar Economy“, first published as "4,5 Millionen Verlierer", Die Zeit, December 22, 2003, p. 28.