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From a historical perspective, the social market economy has done well in generating products, in stimulating technical change and providing high rates of economic growth. At 8 percent, the growth rate of real GNP was high in the early fifties; it has come down to 3 percent in the late eighties (4 percent in the sixties, 3,5 percent in the seventies and a slump in the early eighties). The unemployment rate was originally high, but it was reduced quickly in the fifties and remained very low up to 1974, rising steadily thereafter to a high level of nearly 9 percent. Inflation was nonexistent in the fifties (except in 1951) and sixties, but it increased in the seventies and the early eighties.
Table 1 - Macroeconomic Variables, Federal Republic of Germany (five-year average)
External Shocks A tremendous initial challenge was the inflow of 12 million refugees. Employment and housing had to be provided;
infrastructure had to be supplied, and the refugees had to be integrated into society. Overall, the system fared pretty well.
Another shock was provided by the two oil crises of the seventies, and though there were some voices not trusting the market, the market mechanism did pretty well in adjusting to this scarcity shock.
All in all, the Federal Republic underwent a stark change in its sectoral structure by strongly reducing employment in agriculture, by a continuous rise of the service activities and, since 1970, by a relative decline in manufacturing (Siebert 1989a). There is an overall consensus that the German economy, being heavily dependent on foreign trade, has to adjust to the changes in the world economy.
The Conflict between the Principles
There is a broad range of problems where the basic principles of personal liberty, the competitive order and equity are in harmony. Thus, the competitive order is instrumental in allowing personal freedom and in contributing towards a solution to the social question. But there are problems where the basic principles are in conflict and where a balance between efficiency and equity has to be found. This problem of finding a balance is a continuous process, and the opportunity costs of solutions will become only apparent over time. Since it is an important issue, the overall features of the social market economy should not be destroyed. There are five areas where these overall features are challenged, namely through subsidies and distortions, the size of the government, regulation, rent seeking and specifically through social regulation.
Subsidies and Distortions. Sectorial adjustments have been dampened by subsidies for ailing industries like coal, shipbuilding, and steel. Subsidized sectors are typically characterized by a small number of firms, low growth, strong import penetration and a historically high level of protection.
Most subsidized or protected sectors used to have a large number of employees (and voters), but today they are in fact quite capital intensive (mining, steel, shipbuilding, and even parts of textiles and clothing). Shielding workers from too strong structural adjustments is a specific motive, and rent-seeking is a good explanation.
In the coal industry, a work place is subsidized by 35,000 DM per annum (1986) which amounts to 57 percent of the average total labor costs per person employed in this industry (Kiel Institute of World Economics, own calculations). Subsidies have severely changed the position of individual firms, for instance subsidizing Arbed has severely affected the private producer Korf. They have distorted the sectoral structure and they have retarded the adjustment of sectors and whole regions. Their most detrimental impact has been to ward off the location of new industries, for instance by preventing lower wages in regions with ailing industries and by their impact on the planning of land use (Siebert 1989a). Politicians have not been courageous at all in reducing subsidies, and a sunset law for subsidies has never been tried.
A defensive sectoral policy for ailing sectors is not the only case of distortion. Industrial targeting may become the more relevant area. Politicians do not trust the market to develop new sectors, and they claim to know better in which sectors to place capital, including public funds. This appeal of strategic trade policy extends beyond subsidies. In the eyes of the European Commission, competition policy can be more generous vis-a-vis larger units if they fit into the strategic trade policy concepts.
Experience with promoting new sectors in Germany artificially, for instance subsidizing the development of nuclear plants and larger computers, is disappointing. Cycles of interventionism have been observed in government activities, for instance in town planning (Siebert 1980, p. 368). There is no doubt that strategic trade policy is a threat to the market economy, because decentralized private decisions are substituted by a political process. Strategic trade theory seems to be so fascinating for the political area that the concept of "Wirtschaftsordnung" tends to move into the background.
The experience with subsidies is disillusioning. The amount of subsidies is high, being estimated at 133 bill DM for 1989, that is 5.9 percent of GNP (Kiel Institute of World Economics, own calculations) and not too far from the wage income tax receipts (182 bill DM, 1989), the most important single tax in Germany.
The risk of the system as a whole is that specific interest groups may be able to dominate the state. An institutional check on subsidies and distortions would consist of clearly defining the role of government in a market economy, especially its allocative function to provide social overhead capital (technical infrastructure) and other public goods (basic research) as well as financing (taxation schemes). A compulsory depreciation rule for subsidies may be a powerful tool.
Privatization and the Role of Government. The share of government expenditures in GNP may be considered to be an indicator of the role of the government in a market economy. For the Federal Republic, it has moved around 48 percent in the last 15 years with a peak in 1982 (50 percent). In the late 1980s, there was a small decline. A large part (18.5 percentage points) is made up of the social security system with an increasing upwards trend.
Public enterprises are mainly engaged in electricities, gas, water, local and urban transportation services, railways, communication, residential construction and some areas of manufacturing. They account for 7 percent of employment and roughly 15 percent of gross investment in the Federal Republic of Germany (Europaischer Zentralverband der offentlichen Wirtschaft 1987, pp. 35, 37). The privatization of public firms has been rather timid.
Constitutional checks on the size of government, on governmental expenditures or on financing may be the appropriate answer to the tendency of the government to take over a larger role in a market economy.
Regulation. Regulation of industry and services has occurred in many areas, namely in all sectors that have received exemptions from the German antitrust law (Gesetz gegen Wettbewerbsbeschrankungen), agriculture, the coal and the iron industry, banking and insurance, transportation and communication (including the postal service and public electricity, gas and water utilities).
Moreover, regulations apply to environmental protection and to many other aspects such as the health system and information media (Donges and Schatz 1986).
The basic feature of regulation is to exclude competition and to limit market access. It has been estimated that, measured in terms of value added, roughly 50 percent of the German economy is severely regulated (Donges and Schatz 1986, pp. 26 f ). In order to prevent excessive profits from being gained out of the monopolistic position created by regulation, in some important cases the setting of prices is also controlled. In many cases, however, the right of a restricted market entry is given away for free, for instance when limited emission rights are de facto granted at a zero price.
Arguments for regulation are natural monopolies, protection of the consumer and the internalization of externalities. The basic question is to what extent these arguments are valid and to what extent regulation really is in the interest of the individual.
Besides the primary effects of higher prices due to reduced competition, regulation tends to have side effects that may not be apparent at a first glance. For instance, the German regulation of trucking has increased the comparative advantage of Dutch truckers and has shifted locational advantage away from the North German ports. Moreover, regulation of trucking, for instance forbidding market entry to the trucking division of producing firms or cabotage rules for foreign truckers, generates excess traffic which is not consistent with energy conservation or environmental protection.
One way out would be to auction off access rights whenever these rights can be linked to quantities, for instance auctioning off emission rights, the right to participate in a stock exchange, and the right to provide a transportation service. The other way out is explicitly to allow market access. This is especially important in the light of new concepts of competition such as contestable markets. Europe '92 may be a way to improve market access.
A challenge for the market economy will be to revise the exemptions from the German antitrust law. In banking and insurance, the protection of the customer (Anlegerschutz, Glaubigerschutz) should not be attained by limiting market access. Stock exchanges should be opened to more competition. In the case of the postal service we see a modest structural change including a more open market in final products. In electricity, new property rights for common carriers will have to be developed to allow competition.
Finally, in the transportation sector, deregulation is possible in trucking and in airlines (Donges and Schatz 1986; Soltwedel et al. 1986). In all these areas and in other regulated fields (coal, steel, crafts) a huge potential for deregulation exists.
Rent-seeking. Subsidies may be controled by sunset laws, and excessive government expenditures may be checked by rules of financing. Competition policy is the answer to an endogenous tendency to encroach upon competition by establishing noncompetitive market positions. What is the institutional response to rent-seeking by which the frame of reference for private decisions is altered and by which partial orders are politicized? Linked to this issue of rent-seeking is the problem of economic power and of vested interests (Kloten 1989, p. 15).
Apparently, a systematic institutional check on rent-seeking does not exist. Competition policy of the traditional type, relating to positions in the relevant market, is not the adequate answer.
Guaranteeing free market access in order to keep markets contestable is an important step against rent-seeking. But it does not seem to be a sufficient institutional safeguard because rents are determined by many factors including favorable institutional (legal) conditions of operation. To think in terms of an economic order - "Denken in Ordnungen" - may be a guarantee against special interests of subgroups of society and against rent-seeking - but there may be some indications that this philosophy is losing ground (Kloten 1989, p. 15).
Protection of the Individual versus Flexibility. The regulation of the labor market has its roots in the intention to protect the individual. Labor market regulation consists of three basic aspects: (i) governmental insurance schemes if people are unemployed (ill, disabled and retired), (ii) lay-off restraints, and (iii) the delegation of bargaining for the wage contract to the employer's and employee's organizations with the bargaining solution de facto becoming law and being mandatory for all employees, including trade union non-members ("Allgemeinverbindlichkeit").
This system of regulation implicitly defines the incentives to supply and demand labor. The incentives work in the direction of reducing the demand for labor and uncoupling employment and growth as well as investment and employment. This is a deficiency of the system. As is the case for any insurance, social insurance gives rise to moral hazard behavior of those insured.