Capitalism formerly known as the German Model and its Re-Formation. Part 1

Re-Forming Capitalism

Re-Forming Capitalism

Thinking about Germany, what are the first people or things that come to your mind? Friedrich Schiller? Heinrich Heine? Oktoberfest? Abwrackprämie? Coordinated capitalism? Hm, Schiller’s spirit of freedom is unequalled, but Heinrich Heine chose to leave the country, and German capitalism is no longer what it used to be. In the distinction of the ‘Varieties of Capitalism’ introduced by Peter Hall and David Soskice (2001), the German model has been discussed as a paradigmatic example of a coordinated market economy in Europe, Japan as a paradigmatic example for a coordinated economy in Asia. ‘Varieties of Capitalism’ (Hall/Soskice) holds that liberal economies and coordinated economies both have their characteristic set of institutions playing together in such a manner that liberal economies offer ideal structural conditions for radical innovation within companies and their interorganizational networks, and coordinated market economies offer ideal structural conditions for incremental innovation.

Wolfgang Streeck in his new book “Re-Forming Capitalism” – a must read – offers a dynamic version of political economy and shows the German economy has undergone such tremendous change in the areas of wage structure and wage-setting, business organizations and trade unions, social policy, public finance and corporate governance in recent decades, that the term no longer applies. It must be rather discussed about the general political and institutional of capitalism than the idea of varieties of capitalism suggests. The keywords of structural change Streeck identifies are ‘flexibilization’ and ‘liberalization’ rather than ‘globalization’ that forces a shift in the relationship between market, state and civil society. (Streeck 2009: 25). In this and the next blog post, I’ll discuss the transformation of the German model based on Streecks‘ inspiring new book, some old material from my dissertation and a bit of illustrative material I found online.

Streeck introduces five institutional trajectories: industry wide collective bargaining, intermediate organizations, social policy, public finance and corporate governance. In the sector of collective bargaining, the number of employees covered by industry-wide collective bargaining declined from 72% (1995) to 57% (2006), the number of workplaces covered by industry-wide collective bargaining went down from 53% to 37%. There also appears to be a long-term decline in the number of work counsils in companies and the workforce represented by them. The share of private sector workers represented by work counsils declined from ca. 50 % in 1981 to about 45 % in 1990 and further down afterwards. In the number of workplaces covered by industry wide collective agreements, we see a controlled process of decentralization such that more and more companies make use of provisions for locally negotiated modification of employment conditions. These exceptions (Öffnungsklauseln) are about extension or shortage of working hours, reduction of bonus pay, reduction of holiday pay, suspension of wage increase or reduction of base pay in wages (page 41). Since the mid 1990, we also witness a process of wage dispersion: Between 1992 and 2001, the D5:D1 ratio has risen from 1.43 to 1.65 in male employees in Western Germany (page 42). Streeck connects the decline of unionization and the continuous shrinking of industry-wide agreements and increasing fragmentization with the obvious decline of pay at the lower end of wage dispersion.

Organized labor and capital were at the core of the German model of coordinated capitalism as I learned in my school days, but since the early 1990s membership both of labor unions and capital has been shrinking: Unionization has gone down from 35 % in 1950 to 31 % in 1992 and further down to 19.7 % in 2003 (page 47). Membership in organized capital has also declined, but not as drastically. In the mid 1990s the employer organizations BDA and BDI urged neoliberal reforms and a neoliberal shift in industrial relations. In 1996, President of BDI Olaf Henkel, publicly intervened to prevent the election of the more moderate President of BDA Murmann for President of the European Business confederation, UNICE. Subsequently, German employer association took a more conflictual stance: In 1999, BDA and BDI lobbied against a legislation proposal sagging the works counsil system. In 2000, employer organization Gesamtmetall, agreed to fund a public relations initiative, called Neue Soziale Marktwirtschaft which proposed a neoliberal program of institutional reforms, suggesting that German Model of Soziale Marktwirtschaft can no longer be held up under the conditions of economic globalization. Looking at employer organizations and labor unions, Streeck argues that the relation shifted from complementarity to mutual destabilization, leading to the deterioration of Flächentarifvertrag (equal pay for the same work), leading to increased wage differentials. Legal minimum wages have long been an anathema for trade unions, but now – in the face of millions of low wage jobs – union ver.di argues for national minimum wage of € 7,50 per hour, and more unions are joining in.

Starting with Bismarck in the 1870s, German Social policy has been known to be a paradigmatic example of welfare corporatism and a backbone of Sozialer Friede. Quoting Philip Manow, Streeck describes the changing relations of interdependence between collective bargaining, status and structure of intermediates and social policy in response to emerging unemployment after the Oil crisis using unemployment insurance, labor market policy and the pension system for a restrictive management of labor supply as a “pathological case”. In the 1990s, the costs of a “high-equality, low-activity” market regime went over the top, leading to unbearable rates to social security, and the German government used the system not just to hide the real dimension of unemployment but also to balance their budgets without increasing taxes. In 2003 and 2004 the German government of SPD and Green party introduced the ‘Hartz’ reforms: They shortened the duration of unemployment benefits from 32 to 12 months of payment, they increased pressure to accept job offers, and they combined long-term unemployment and social security to a single flat-rate benefit of now € 351 for unmarried people (including electricity costs), and subsequent legislation tightened living conditions and increased obligations for people depending on this new form of welfare. Social policy which had helped ensure cooperation now turned into a source of ‘disorganization’, argues Streeck, it reinforced divisions between large and small companies, the rift between traditional and moderate unions, and it proved to be a source of subversion of German welfare corporatism.

Then, Streeck brings in the fiscal development of postwar Germany. While in 1962 the fiscal debt was below 20% of GDP, it went up to 40 in the 1990s and to almost 70 in 2006. Accordingly, debt service and subsidies accounted for almost 50 % of GDP in 2006. While public borrowing increases current policy options, it forecloses future options, options for discretionary spending decisions are consumed. In 1974, the discretionary expenditure of the federal government equalled 43 % of GDP, and government spending went down to less than 19 in 2005. Consequently, privatization has three aspects: selling off state property, contracting out state activities and inviting in private competition to increase pressure on providers of public sources.

Next comes the network formerly known as “Deutschland AG” (Germany Inc.), the dense interlinkeage of cross-shareholdings and interlocking directorates amongst the 100 largest German companies, known for its behind-the-scenes industrial diplomacy, insider-deal-making business, strong positions of labor and a firm commitment on the side of the state to not let the big players fail. The decline of “Deutschland AG” introduces an aspect of institutional change in corporate governance from internal control on the side of Hausbanken (principle banks) toward a market for corporate governance based on shareholder value and, accordingly, the interests of shareholders. The disintegration of “Deutschland AG” began as early as the 1980s when large banks began to withdraw from their traditional role as provider for cheap credit and resource for long term sustainable development based on operative profits and protection from hostile takeovers followed by a strategic shift in management as to generate corporate value. The big shift, though, came in the mid 1990s with Deutsche Bank and Allianz AG, both positioned at the center of Germany Inc. made a strategic shift toward more profitable investment banking and global financial trade. They withdrew from boards of their client firms, selling shares and turning toward investment banking with the consequence. Hence, German firms increasingly became targets for hostile takeovers (Streeck 2009: 78; Beyer 2003: 118-146). The transformation of Corporate Governance in the companies formerly known as the “Deutschland AG” becomes obvious in the decline of cross shareholdings amongst the 100 largest German from 1996 to present. It also becomes obvious in shrinking percentage of CEOs with professional expertise in the public sector, and the decline of average years in tenure of sitting CEOs form 12.3 years in 1980 in 8.4 years in 2000 (Streeck 2009: 82). Expectedly, with the dissolution of “Deutschland AG” management salary made a steap move upwards, following the idea that globally operating companies must not allow competitors to attract the best talent. For the 40 largest companies, Höpner found an increase in average base pay of 66 % between 1996 and 1999. Following Frankfurter Allgemeine Zeitung, average yearly salary for executive board members, including CEOs, augmented from € 1,16 million in 2001 to € 1.71 million in 2005, an increase by 46 %. The dissolution of Deutschland AG strengthened the position of shareholders within the stakeholder communities of companies and weakened the position of work counsils and trade unions.

The Streeck reading of the development discussed here is to discuss the development outlined here as a long-term systemic and institutional deterioration of the institutions that German coordinated capitalism rests upon with the result that fundamental institutions of coordinated capitalism cease to exist and German coordinated capitalism transforms itself to a different set of institutions with ‘disorganization’, ‘flexibilization’ and ‘economization’ of political-economic institutions rather than ‘globalization’, ‘dynamization’, transformation from mechanical to organical solidarity and from justice in terms of results to ‘justice as fairness’ which represents the other side of the same coin.

My reading of this story from a book chapter together with Richard Münch “Der Markt in der Organisation. Von der Hegemonie der Fachspezialisten zur Hegemonie des Finanzmanagements” (In Windolf (ed.) 2005) and from my dissertation thesis – with the case of Bayer – was the adaptation of companies in the organizational field of “Deutschland AG” to the logic of global financial capitalism and the global market field was an interplay of coercive, mimetic and normative adaptation to the regime of ‘globalization’, ‘liberalization’, ‘formal rationality’ which dynamizes the internal structure (like it dynamizes the political-economic institutions in the environment of the organization, too). It opens a window of opportunity for new professions to get in charge of decision-making of the company’s future: The dominance of experts from the sciences in Bayer was broken, and experts from the disciplines of management and finance became the dominating group of experts in Bayer leadership. Their rationale of economy and their understanding of the global financial market became the dominating regime within the leadership circles of Bayer such that this financial market logic becomes integrated into the corporate governance structure – a new conception of control within the company. My present interpretation puts a stronger emphasis on Schumpetarian long-term business cycles, such that the adaptation in the companies was coercive, mimetic and normative because the institutional trajectory took place in an episode of economic expansion that was near the peak of a long-term Schumpetarian mortgage wave beginning in the with the first historic mortgage contracts and the mortgage business that got a new quality in the episode refer to as “financial market capitalism”. Looking back, now that stock owners, employees, trade unions and the state cannot escape the giant ship of „financial market capitalism“ which is going down the huge wave of recession, the decision to join and adapt to the rules of the field looks rather stupid, but things will look much brighter once the economy picks up again. The following little piece of video (in German) is an example of how bad the economic outlook in the current financial crisis would be if we confined our perspective to a static diagnosis of the situation and failed to take into account long term economic development. On February 5, 2009, n-tv newsman Friedhelm Busch argues with his colleague Raimund Brichta over the fate of Hypo Real Estate, its lack of equity and the fact that there is no option but the state to step in for the bank to survive. On the other hand, it can be expected that HRE’s value will be restored if the state preserves the bank until the bank picks up on its economic activity and begins fulfilling its social function: lend money. Only then the original value of HRE can be restored, such that a positive outlook for the bank’s future is conceivable.

Part II

3 Antworten zu “Capitalism formerly known as the German Model and its Re-Formation. Part 1

  1. Pingback: News about Finance and related topics » Capitalism formerly known as the German Model and its Re-Formation. Part 1

  2. „Friedrich Schiller? Heinrich Heine? Oktoberfest? Abwrackprämie? Coordinated capitalism?“
    – splendid!🙂

  3. Pingback: Capitalism formerly known as the German Model and its Re-Formation. Part II « sozlog

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