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Let’s hope US policymakers have woken up to the fact that the country is in a period of sclerosis, where its economic institutions seem to be inefficient along a variety of fronts. When things aren’t working, one good idea is to look around and see which countries are doing better.
Right now, Japan is one such country. But in many ways, Germany looks like the most successful economy in the developed world.
This wasn’t always the case. It was a German economist who coined the term “Eurosclerosis” to describe the slow growth that plagued the country from the 1980s through the 1990s. In the late 2000s, even as the US economy boomed, Germany’s unemployment rate exceeded 10%.
But almost a decade after the global financial crisis, the country has found its legs. Unemployment is down. Labour force participation has risen steadily. Wages have gone up as well, outpacing the US since the 1990s and looking healthy in recent years.
This stellar performance comes even as Germany faces many of the same challenges as other rich countries.
Its fertility rate is low—just 1.38 children per woman, even lower than Japan. And its population is slowly shrinking. That means that a smaller and smaller base of German workers has to support a growing number of retirees.
Germany also hasn’t escaped the global productivity slowdown. Like other rich countries, it’s struggling to produce more from the same amount of resources.
And Germany has also been dealing with the challenge of automation, possibly even more than the US. Only Japan has substantially more industrial robots than Germany.
If, as some now claim, robots are a big threat to jobs and wages, German workers should be suffering; instead, their wages have been growing at a steady clip, even as employment has risen.
What is Germany doing right?
The country has a very large state sector, generous welfare spending and a trade unionization rate almost twice that of the US. Though the country did undertake a few free-market reforms in the early 2000s, there has been no major wave of deregulatory mania.
Nor did Germany escape the 2008 financial crisis or the Great Recession, both of which hit it hard. In fact, political and financial instability in the European Union probably was a drag on the country.
A new article by economists Christian Dustmann, Bernd Fitzenberger, Uta Schönberg and Alexandra Spitz-Oener proposes a theory for the German revival. Essentially, they say, it’s all about exports and unions.
The authors note that Germany’s exports have increased steadily. Though the country accounts for less than 5% of global output, it has about 9% of world exports. Sales to other countries account for about half of Germany’s gross domestic product—more than twice as much as for China.
Why is Germany such an export powerhouse?
Dustmann, et al. attribute it to the country’s wage competitiveness. In Germany, wages are set by collective bargaining at the industry and regional level, rather than at the company level as in the US.
According to the authors, German unions’ willingness to hold down wages led to lower production costs in Germany, allowing the country to export more.
And although it may seem counter-intuitive at first glance, limiting wage gains eventually led to faster wage growth.
Think about it. Companies deciding where to produce things have to base their decisions not just on today’s wage level, but on their expectations of future wage changes.
German unions’ willingness to contain or forgo raises in bad times could act as an insurance policy for companies in good times, making them feel safer about building expensive factories and making risky long-term investments in the country.
But there are also other, more troubling explanations for Germany’s performance.
The country’s exports have not been matched by imports—Germany runs a very large trade surplus.
Under normal conditions, economists believe that if a country runs a trade surplus, its exchange rate should rise to cancel out some of the imbalance.
But Germany is part of the euro- zone, most of which is in an economic slump. That slump holds down the euro’s exchange rate against that of many other countries, making German exports cheap.
Also, the unified currency doesn’t allow the exchange rates of slower-growing countries such as Greece or Spain to fall against Germany, meaning that Germany gets a boost to exports within Europe.
Some of Germany’s export competitiveness, then, might be coming at the expense of other countries. And some might depend on other European nations being in a slump. Those advantages would be either unhealthy or temporary.
But if Germany’s success really is due to its unique method of collective bargaining, other countries—especially those with large persistent manufacturing trade deficits, such as the US and India—should think about ways to emulate the German system’s advantages.
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In a diverse country like India, where each State is socially, culturally, economically, and politically distinct, measuring Governance becomes increasingly tricky. The Public Affairs Index (PAI 2021) is a scientifically rigorous, data-based framework that measures the quality of governance at the Sub-national level and ranks the States and Union Territories (UTs) of India on a Composite Index (CI).
States are classified into two categories – Large and Small – using population as the criteria.
In PAI 2021, PAC defined three significant pillars that embody Governance – Growth, Equity, and Sustainability. Each of the three Pillars is circumscribed by five governance praxis Themes.
The themes include – Voice and Accountability, Government Effectiveness, Rule of Law, Regulatory Quality and Control of Corruption.
At the bottom of the pyramid, 43 component indicators are mapped to 14 Sustainable Development Goals (SDGs) that are relevant to the States and UTs.
This forms the foundation of the conceptual framework of PAI 2021. The choice of the 43 indicators that go into the calculation of the CI were dictated by the objective of uncovering the complexity and multidimensional character of development governance
The Equity Principle
The Equity Pillar of the PAI 2021 Index analyses the inclusiveness impact at the Sub-national level in the country; inclusiveness in terms of the welfare of a society that depends primarily on establishing that all people feel that they have a say in the governance and are not excluded from the mainstream policy framework.
This requires all individuals and communities, but particularly the most vulnerable, to have an opportunity to improve or maintain their wellbeing. This chapter of PAI 2021 reflects the performance of States and UTs during the pandemic and questions the governance infrastructure in the country, analysing the effectiveness of schemes and the general livelihood of the people in terms of Equity.
Growth and its Discontents
Growth in its multidimensional form encompasses the essence of access to and the availability and optimal utilisation of resources. By resources, PAI 2021 refer to human resources, infrastructure and the budgetary allocations. Capacity building of an economy cannot take place if all the key players of growth do not drive development. The multiplier effects of better health care, improved educational outcomes, increased capital accumulation and lower unemployment levels contribute magnificently in the growth and development of the States.
The Pursuit Of Sustainability
The Sustainability Pillar analyses the access to and usage of resources that has an impact on environment, economy and humankind. The Pillar subsumes two themes and uses seven indicators to measure the effectiveness of government efforts with regards to Sustainability.
The Curious Case Of The Delta
The Delta Analysis presents the results on the State performance on year-on-year improvement. The rankings are measured as the Delta value over the last five to 10 years of data available for 12 Key Development Indicators (KDI). In PAI 2021, 12 indicators across the three Pillars of Equity (five indicators), Growth (five indicators) and Sustainability (two indicators). These KDIs are the outcome indicators crucial to assess Human Development. The Performance in the Delta Analysis is then compared to the Overall PAI 2021 Index.
Key Findings:-
In the Scheme of Things
The Scheme Analysis adds an additional dimension to ranking of the States on their governance. It attempts to complement the Governance Model by trying to understand the developmental activities undertaken by State Governments in the form of schemes. It also tries to understand whether better performance of States in schemes reflect in better governance.
The Centrally Sponsored schemes that were analysed are National Health Mission (NHM), Umbrella Integrated Child Development Services scheme (ICDS), Mahatma Gandh National Rural Employment Guarantee Scheme (MGNREGS), Samagra Shiksha Abhiyan (SmSA) and MidDay Meal Scheme (MDMS).
National Health Mission (NHM)
INTEGRATED CHILD DEVELOPMENT SERVICES (ICDS)
MID- DAY MEAL SCHEME (MDMS)
SAMAGRA SHIKSHA ABHIYAN (SMSA)
MAHATMA GANDHI NATIONAL RURAL EMPLOYMENT GUARANTEE SCHEME (MGNREGS)