The German Model Reconsidered

By Kwon, Hyeong-ki | German Politics and Society, Winter 2002 | Go to article overview

The German Model Reconsidered


Kwon, Hyeong-ki, German Politics and Society


The German model of political economy that had been an enviable alternative to the liberal market until the late 1980s in the literature of political economy was under serious structural crisis throughout the 1990s, causing serious doubts about its viability. Many neoliberals and industrial experts in Germany began to doubt whether Germany was an attractive place for business activity, initiating the Standort Deutschland debate. Even German Chancellor Gerhard Schroder conceded "the end of German model." (1) Many political economists and journalists expected and recommended imitating the American model of a liberal market. Prominent German newspapers and magazines such as the Frankfurter Allgemeine Zeitung, Der Spiegel and Die Woche ran articles titled "The Discovery of America" and "Jobwunder in Amerika." Wolfgang Streeck, one of the main proponents of the German model, expected the convergence of the German economy toward an American-led liberal market economy under globalization because of "a secular exhaustion of the German model." Streeck believed that the postwar German model was based on the politics between labor and capital within a national boundary, but globalization represents a fluidity of financial and labor markets that extricates whatever coordination has been nationally accomplished. (2)

By contrast, many institutionalists, including Peter Hall, David Soskice, and Sigurt Vitols, argued for the persistence of the German model. (3) They expected that Germans would solve economic problems by capitalizing on their institutional advantages compared to a liberal market economy. According to proponents of the theory of "comparative institutional advantage," the institutional structure in a particular nation-state provides companies with advantages for engaging in specific types of activities. They believed that the crises of the German economy in the 1990s were cyclical, and they concluded that the German corporatist model survived by virtue of the existing German pattern of "incremental innovation" or "diversified quality production."

This paper will address the extent to which the German model has changed at the turn of century. In addition, it will examine what direction that change has taken. Does it converge toward an American model of a liberal market? Finally, why did it change? This paper claims that, contrary to the claims of the theorists of comparative institutional advantage, the original German model is not frozen in place, despite the fact that a reasonable level of economic growth resumed at the end of the 1990s. The German institutions in the political economy changed not only in the scope and effectiveness of existing coordinating institutions but also in the way of working, although the formal institutions, such as corporatist coordination and codetermination, still remain. Despite its formal stability, the scope and power of centralized corporatist coordination underwent a fundamental transformation toward a decentralized and flexible form. The traditional virtuous circle of the German model (corporatist beneficial constraints for high wages--international competitiveness) did not work at the end of the 1990s. The existing functional and occupation-oriented system (Beruflichkeit) of German production, which had supported international competitiveness even at high wages, changed, becoming more of a cross-functional and organization-oriented system.

Nevertheless, the transformation of the German model does not confirm the convergence toward the American model of a liberal market. The American model of political economy, termed "the Anglo-Saxon model" (versus the Rhenish model), "market-oriented economy" (versus institutionalized capitalism), or "liberal market economy" (versus coordinated market economy), is characterized by a high sensitivity to short-term profitability (for example, high mobility of jobs, the so-called exit model versus the voice model, short-term employment contracts, easy lay-off depending on short-term profitability), high inequality of incomes, and little coordination by social entities such as associations and trade unions.

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