Throughout most of history, it has generally been the case
that a dominant regime of long-standing fails when it is defeated in war
by another regime which has developed better weapons. Once defeated, such
a regime is rarely able to regenerate itself even though its geography,
its climate, its people and, apparently its culture, are much as they
were before. It is nearly always the case also that the regime not only
fails to regain some sort of normalcy but actually degenerates. Some
vital spark is missing; its culture retains its outward form but the
vitality has gone. We can instance almost all the ancient empires of
Eurasia from the earliest, the Sumerian civilisation of about 3,000BC,
right through to the fall of the Ottoman Empire in the 1920s which have
gone through this cycle.
There are, of course, other reasons why regimes have failed historically
(over-government is another) but, for the most part, it has been
innovations in weaponry -- and, usually, just one outstanding innovation
-- which has caused the downfall. However, in more recent times, as
hinted in my posting a few days ago ("123. Know-how
economies"), it is not a lack of military innovation that directly
brings a regime down but an inability to develop new non-military
technologies which might have given it sufficient economic edge. Or, if
they do -- and thereby flash forth brightly in the economic sky for a
while -- they are unable to develop further ones. Thus, Germany was far
ahead in superb mechanical engineering technology in the early part of
the last century, the Soviet Union was far ahead in space technology in
the 1950s, and the Japanese in electronic technology in the 70s and
80s.
Yet these countries developed very little else of equivalent
inventiveness and, indeed, all three of these countries allowed most of
the rest of their industry and commerce to become grossly inefficent and
increasingly mired in regulations which diminished any possibility of
inventors and entrepreneurs getting new technologies off the ground. Even
the UK, which has blazed away modestly with a succession of new
technologies and innovative ideas for most of the last two hundred years
-- right up to inventing the computer in the 50s and discovering the
structure of DNA in the 70s (albeit with the help of an American, James
Watson!) -- seems to have given up the ghost now with no distinctive new
technology in the offing (at least I can't think of one); we, too, seem
to be in the early years of settling into a morass of regulation out of
which no political party seems able to offer deliverance.
So far, America has escaped the fate of the other prime economies of the
last century. It still seems to be developing innovative technologies
such as genetics and nanotechnology, but it remains to be seen whether
its lead can be retained or whether a revitalised China will overtake it
in the coming years. In the meantime, we in Europe can only watch
helplessly. It is possible perhaps that some European countries might
heed the lessons of Russia, Japan and, more recently, Germany, and
somehow shake off their lethargy, but it seems doubtful to me. I've read
a lot about the present predicament of Russia and Japan but I can't say
that I understand what goes on there -- their cultures are too different
from my own mind-set -- but I think I understand better what is going on
in Germany and the following article will be useful material for my
project as it pauses here for a few moments before going into my
database. (Incidentally, since this article appeared in the
Financial Times yesterday, Gerhard Schröder's deputy, Rudolph
Scharping, has resigned in protest at his boss's reforms, so it look even
less promising than before.)
Keith Hudson
<<<<
WHY SCHRÖDER'S REFORMS ARE BAD ECONOMICS
Wolfgang Munchau
Gerhard Schröder, the German chancellor, won an important political
victory on Friday when the parliament endorsed his programme of
structural reforms. Given his wafer-thin majority and the many sceptics
in his own party, this was an object lesson in the use of political
power.
The reforms consist of cuts in welfare payments for the long-term
unemployed, a reorganisation of the employment administration and changes
to local finances and corporate taxation. The test is whether these
reforms will help improve economic performance. But they are bound to
fail.
Germany's trend growth rate has been falling for decades but the decline
has been accelerated by unification. It now stands at 1 per cent in real
terms.
Three years of zero growth cannot be explained by macroeconomic policy
alone. The government forecasts a deficit of 4 per cent of gross domestic
product for this year. But there is a series of adjustments to come that
will push the deficit close to 5 per cent. Nominal short-term interest
rates are at 2 per cent -- perhaps not ideal, but hardly a cause for
quite such a bad performance. Nor is competitiveness the problem,
especially not in a year when Germany has overtaken the US as the world's
largest exporter. The problem is a chronic incapacity to generate
domestic growth. This is what any reform programme must
address.
Economic history may provide a partial explanation for this imbalance.
After two world wars and two periods of hyperinflation, modern Germany's
founders turned stability into the prime objective of economic policy.
But they made the mistake of subjecting the entire system, from monetary
policy to labour market regulation, to this goal. In today's largely
unchanged environment, DaimlerChrysler and Siemens can still operate
profitably, having adjusted to the system. New entrants, however, find
Germany a hostile environment in which to work and live. Stability has
come at the expense of flexibility.
The weakness in domestic growth stems from low levels of investment and
consumption. Consumption has been flat, but the fall in levels of
investment has been dramatic. To foster domestic growth through higher
investment, the German government should look at measures aimed at
immediately improving efficiency and, in the long term, increasing growth
potential. To realise the first objective the government needs to address
reforms in financial, product and labour markets much more directly.
Germany has yet to restructure its convoluted public sector banking
system and establish a regulatory environment for a functioning venture
capital industry. The capital markets remain underdeveloped, as companies
still find it easier to raise finance directly through the banks rather
than by issuing shares or debt.
Inefficiencies on the product market side include outdated competition
laws, high barriers to entry -- such as professional qualification
requirements for craftsmen -- and restrictions on shopping
hours.
The list of labour market rigidities is even longer. High indirect labour
costs coupled with the requirement for employers to co-finance the social
security system have effectively prevented the emergence of a low-wage
sector and transferred resources from those in work to those out of work,
the long-term unemployed and pensioners. The wage cartel is also in need
of reform, not because it has inflated salary levels, as is often falsely
claimed, but because it has not allowed for sufficient
flexibility.
Of course, one can still argue that Mr Schröder's reforms are only a
first step. That may be so, but subsequent reforms will be from the same
mould. The government is considering a few symbolic measures, such as a
modest relaxation of the laws on hiring and firing, but not the deep
structural reforms needed to increase investment:
Mr Schröder is a pragmatic man. It is realpolitik in its truest sense.
But it is bad economics. His reforms are an attempt to adjust the welfare
state to fit a less affluent society. He should do the opposite: focus on
raising growth through higher investment, so he can afford the kind of
society most Germans want to live in.
Financial Times -- 21 October 2003
>>>>
Keith Hudson, Bath, England,
<www.evolutionary-economics.org>,
<www.handlo.com>,
<www.property-portraits.co.uk>
