To be competitive, Germany is finding it must adapt

October 31, 1994|By Christian Science Monitor

BONN -- Since the Industrial Revolution, manufacturing strengths have propped up the German economic machine.

Industrial giants -- names such as Daimler-Benz, Krupp, Volkswagen and Bayer -- made Germany the economic powerhouse of present-day Europe and a crucial player in the effort to achieve lasting Continental prosperity.

But the economic rules are rapidly changing as Europe prepares for the 21st century. The service sector is coming to dominate heavy industry in the new age, and the cutting edge will involve developing computers and other information technology rather than heavy machinery.

That is prompting some economists to warn that Germany is dangerously underprepared for economic competition in the post-Cold War world.

"We need much more flexibility than we have right now," says Jurgen Dongas, an economist at the University of Cologne who served on the government's Deregulation Commission from 1989 to 1991.

"The future of the industrial state, that is the issue," says Arnulf Baring, a Berlin political scientist. "We cannot maintain the current social-welfare state if we don't change the way industry works."

Responsibility for guiding Germany through the transition will fall on Chancellor Helmut Kohl's coalition, which scored a narrow victory in the Oct. 16 elections. Mr. Kohl advocates deregulation, but it is unclear whether the chancellor -- one of the last remaining world leaders from the Cold War era -- retains the vigor and vision to implement dramatic change.

The German economy is governed by some of the stiffest regulations in Europe. While future prosperity may hinge on the retail and service sectors, they may be the most rigid areas of the economy.

Shopping hours, for example, are strictly regulated, with stores closed nationwide on Sundays and holidays. A cash-only attitude prevails, as many smaller shops still refuse to accept credit cards.

Expansive labor laws -- covering everything from hiring to discounting -- have left customer-service skills underdeveloped. Meanwhile, key service-sector businesses, such as the state-run telephone company, have received government regulation and protection.

"Many companies don't feel they need to provide service," says Volker Gorgen, a deregulation specialist at the German Industry and Trade Council (DIHT), a Bonn think tank. "When you operate like a monopoly, there isn't a need to attract customers."

Despite its rigidity, Germany still has the world's third-largest economy. Statistics indicate a strong economic recovery is under way after the country's worst recession since World War II. The government projects that gross domestic product for 1994 could rise more than 2.5 percent, far exceeding expectations at the start of the year.

The good economic news boosted Mr. Kohl's ratings in opinion polls leading up to the Oct. 16 vote, and was crucial to his coalition's slim win over the Social Democrats.

But if Germany wants to remain a leader in the next century, the post-October government must take quick action to rectify economic deficiencies concealed by the statistics, Mr. Dongas and others say.

Among the economic issues that require urgent attention are privatization, innovation, labor-cost reduction and popular expectations about the welfare state.

The danger to the export-dependent German economy is perhaps best borne out by the fact that the nation's export share outside Europe has dropped steadily over the last two decades. The decline has accelerated sharply in recent years.

Germany will likely come under increased market-share pressure the exporting "Asian tiger" nations, including China, Singapore and South Korea, continue to develop.

German companies have been slow to react to the developing trends. The Paris-based Organization for Economic Cooperation and Development (OECD), in its recent economic report on Germany, described the nation's research-and-development sector as "relatively undynamic, particularly in state-of-the-art sectors," such as computers and biotechnology.

It also stated: "The structural shift from manufacturing to service sectors of the economy has been markedly smaller than in other countries."

The report praised Germany's present economic condition, but says the nation faced erosion to its competitiveness. It recommended that the German government "assume a more forceful leadership role in the creation of a more friendly regulatory environment. Many barriers to new activities -- both explicit regulations and bureaucratic inertia -- have very little basis in either economic or scientific logic."

But Mr. Kohl's narrow win could weaken his ability to press for change. Every halting step to introduce workplace flexibility and to stimulate innovation has met fierce resistance from vested interests, especially organized labor and state bureaucracy.

The opposition to change is understandable, says Mr. Dongas, the economist. Germans work fewer hours and enjoy greater benefits -- including lengthy vacations -- than just about anyone else in Europe.

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