This post will treat certain "stylised facts" about Eurozone imbalances (and here) and the relationship of these to the global economic imbalances situation as by now reasonably well established , at least for the purposes of this weblog. The first of these the "stylised facts" relates to the current debate over the so-called decoupling thesis, about which Claus Vistesen had an excellent recent post. This thesis generally asserts that the current wave of global growth is virtually unprecedented in modern times,and that the structural drivers of this growth - which is characterised by very strong rates of growth in some emerging markets (and in particular in the eurozone context in the new East European EU accession countries) - are new, and fundamentally different from those which characterised global growth in the 1990s. Another "stylised fact" is that large parts of the global economy are still extremely export-dependent on growth in consumer demand in the United States, although the fact that growth globally is running at some 5% per annum while most of the economies in the developed world are growing at under 3% per annum also means that this level of dependence is now in secular decline. This latter point logically leads to the conclusion that growth in the developing world is providing a momentum to this upswing which is what marks the whole process as a novel one.
A third "stylised fact" would be that a number of countries are now revealing themselves as having export-dependent economies. This group can basically be broken down into two components, China and the oil producing states on the one hand, and the growing list of countries (Japan, Germany, Italy, Finland, Austria..) whose median ages are rising steadily upwards over the 40 year mark (and onwards in some cases towards the mid forties) due to the ongoing process of population ageing largely caused by a widespread and generalised demographic transition. Here in this post we are primarily concerned with trying to better understand what is happening in this latter group of "elderly" economies, and Germany will be treated as one very good example of these.
That these "elderly" countries should show themselves to be increasingly dependent on exports should be neither surprising in terms of conventional economic theory - in this case Franco Modigliani's Life Cycle Hypothesis of movements in consumption and saving through the age ranges as applied to populations - nor in terms of the "known facts", since the idea of rising median age being associated with export dependence is now finding increasing empirical support in the anticipated countries (Germany and Japan in particular), where a characteristic pathology of congenitally weak internal demand, comparatively high (even if now declining) saving, and consequent strong dependence on exports to obtain GDP growth seems to be the order of the day. (More argumentation on the median age issue can be found in this post, while Claus ably argues out the implications of all of this for Germany here and here).
So it could be argued that we have both theoretical justification and growing empirical evidence for advancing an "ageing structural characteristics" hypothesis, and I would say we have good grounds for asserting this hypothesis, although doubtless all of this needs more elaboration and validation as more countries age.
But even as we move forward to try and do just that it is probably worth trying to go one step further, and examine some of the implications of this structural dependence for the future growth possibilities of the economies concerned. Are they still able, as some would claim, to generate self-sustaining economic recoveries? Or are they from-now-on-and-henceforth condemned to ever ride the coat-tails of global growth and demand which is generated elsewhere. Much as Claus and I may have been surprised by the resilience shown by the German economy, and indeed by the strong current growth we are seeing across the eurozone as a whole, which as Claus has argued tends to be significantly dependent on Germany, a form of "coupling" which in some ways mirrors the global one in connection with the US, but which involves the very significant difference that while those who are directly coupled to the US economy are in some form or another dependent on the US consumer, those who are indirectly coupled through the mechanisms of the EU - I am thinking here in particular of the eastern accession countries - or through the zone itself are in fact coupled to Germany and thus coupled to Germany's ability to sell exports to consumers both inside the EU and elsewhere.
In Many cases, as we shall see, this generates a strong circularity in eurozone growth, since those in this chain who are also among Germany's major customers (often buying investment goods via cheap euro-denominated credit made available thanks to Germany's high savings rate, or thanks to a highly leveraged carry trade -in Swiss Francs or Japanese Yen - intermediated via the Austrian banking system), are thus sensitive to the strategic importance of the US consumer for the German economy due to their need to export back final product to Germany and other EU destinations, even though the US consumer obviously does not form part of the EU "inner circle".
Turning to the most recent data published by the German Federal Statistical Office we can see that in fact taking into account calendar and seasonal adjustments, German exports in April increased by 0.9% over March 2007. So to some extent the drop in exports in March may be thought of as a blip. Yet if we look at the entire time series for from January 2006 (see Chart below, and please click on image to read) we can see that exports increased very rapidly in the first months of 2006, then the rate of increase slowed a little, there was another burst of activity in September and October, and since that time the rate of increase has been steadily dropping (the far right column showing the adjusted figures month-on-month is perhaps the clearest).
(Please click over chart to read clearly)
In order to investigate further the real nature and dynamics of this export-driven growth phenomenon in Germany it is perhaps worthwhile putting the recent evolution of the German exports in some sort of context. Fortunately we are aided in this by the publication of a recent IMF working paper: What Explains Germany’s Rebounding Export Market Share? by Stephan Danninger and Fred Joutz.As the authors note in their abstract:
Germany’s export market share increased since 2000, while most industrial countries experienced declines.
Now this statement does perhaps need a little clarification, since while it is true that the German market share in exports has increased in volume terms (as shown in the first of the following charts which compares the German performance with the Italian one), in value terms the German share has been declining slightly of late (as shown in the second chart). Nonetheless the German performance is still remarkable given the resilience of German exports even in value terms in the context of a global trade environment where growth has been very rapid indeed, and where several new contenders have made a dramatic entrance on the scene.
Again, as the IMF authors note, exports (and the investments that servicing these implies) form a very important part of the recent German growth phenomenon:
Germany’s export sector has become its main source of economic growth. Since 1999 about 80 percent of real GDP growth was generated from net exports (see the first chart below). Real exports have grown by more than 7 percent per annum since 2000 on the back of growing trade volumes with both traditional European partners and emerging economies. Since 2000 Germany has also begun to regain export market share, especially among industrial countries and the euro area (see second chart below, which is in volume terms).
The paper itself looks at four hypotheses which might help explain Germany's recent stellar export performance, and these are:
(i) improved cost competitiveness through moderate collective wage agreements since the mid 1990s;
(ii) ties to fast growing trading partners as a result of a desirable product mix or long-standing traderelationships;
(iii) increased export demand for capital goods as a response to a global rise in investment activity, and
iv) regionalized production patterns through off-shoring of production to lower cost countries, partly a result of European economic integration (Sinn 2006).
The authors then go on to assess the relative importance of each of these four hypotheses, and examine how their findings influence the prospects for continued German export growth and German economic activity in general. This focus is especially important since, as they note, export growth has been strong despite generally weak domestic demand and low consumption growth.
Their analysis in fact shows that recent export growth can be traced back to the ability of German exporters to meet global demand and to exploit new production and cost-cutting opportunities from offshoring activities. Their analysis also provides some empirical support for the claim that German exports increased as a result of a regional division of labor in the production of goods (the bazaar economy hypothesis, most notably associated with Hans Werner Sinn). They find that the first two factors (ie the ability of German exporters to increase output and offer products that fit in with the recent surge in global demand and their ability to exploit new production and cost cutting opportunities from offshoring activities) are able to explain about 60 percent of the faster increase of German exports since 2000 vis-a-vis the other industrial countries. Changes in relative prices, measured by the real effective exchange rate, on the other hand, seem to have contributed surprisingly little to export growth despite a prolonged period of wage moderation.
I say surprisingly, since this downward movement in relative unit labour costs has often been mentioned as an explanatory variable of some importance in the recent revival of economic activity in Germany.
As the above charts indicate German unification resulted in a steep increase in wage costs, mainly from pressures to close the wage gap between the new and the old Länder, and from tax increases to cover the cost of extending the welfare state. The resulting loss of cost competitiveness and economic restructuring led to a sustained period of high unemployment. By the late 90s a period of extended wage restraint followed and to a large extent the position was reversed.
Since the late 90s wages and salary growth in Germany has lagged behind productivity growth — the cost-neutral margin — in almost every year. Wage costs per unit of output began to decrease sharply in 1995 and have remained at a low level since 2000 despite a significant nominal effective appreciation of the euro. The main factor responsible for this adjustment has been muted wage growth in industry. Average hourly nominal wage growth has declined continuously and has been hovering since 2003 at somewhere around 1-2 % per annum rate. This has lead many observers to conclude that cost competitiveness has been a leading promoter of German export growth, and some have even argued that a return to more normal wage growth is now becoming possible, and that if this were to be realised it would help strengthen the ever-weak German domestic demand position (the so-called Goldilocks recovery hypothesis).
However the IMF authors find that improved internal wage cost competitiveness has played a comparatively minor role in explaining Germany's brisk export growth. They find that Germany's prolonged effort in containing costs through wage moderation has been significant, but this effect has in turn been diluted by the appreciation of the euro. Hence cost competitiveness may be considered to have improved Germany's position vis-à-vis the euro area countries - and consequently it does help explain the significant rise of Germany’s export market share within the eurozone - but this factor does not in and of itself serve to explain the export performance with non-eurozone economies.
Now if we look at recent data from the Federal Statistical Office we will find (as shown in the chart below) that despite the recent concerns over at the ECB about wage induced inflation, the actual movement in gross wages and salaries in Germany has been extremely weak both in 2006 and to date in 2007, despite the apparently favourable growth environment, and so far, for example, there is no real evidence of the "pass through" of the 3% VAT increase. Indeed in the first quarter of 2007 the costs of an hour worked in industry and services as a whole rose by only a calendar-adjusted 0.4% when compared with the same quarter a year earlier. Also upon adjustment for seasonal and calendar effects, labour costs per hour worked remained nearly unchanged (–0.1%) in the first quarter of 2007 against the previous quarter.This is significantly below the rate of inflation, thus it could be said that deflation in real German wages continues, despite a generally tighter labour market.
(Please click over chart to read clearly)
The German Statistical Office also make a Europe-wide comparison of the level and development of labour costs:
In 2006, labour costs in Germany rose by a calendar-adjusted 1.1% in industry and the market service branches – shortly referred to as the private sector – compared with the preceding year. The increase (as measured in euros) was markedly higher especially in the Eastern European member states Czech Republic (+11.7%), Slovakia (+12.1%), Estonia (+16.6%), Lithuania (+18.5%), Latvia (+23.3%) and Romania (+23.5%). Among the reasons for this are appreciations of the national currencies against the euro. In France the corresponding rise was 3.3%, in the United Kingdom 3.6%
The comparison with the UK and France here is most interesting, and it can be seen that the upward movement in German nominal wages is far lower than in these two major European economies.
So the question is really why is this happening?
Well, recent research from the Munich-based economist Dalia Marin may help us out a bit here. In a paper entitled "Is Human Capital Losing from Outsourcing? Evidence for Austria and Poland", Marin et al (see link below, as well as other related material, including a link to the PhD thesis of her student Alexander Raubold, on which much of the resulting research seems to be based) argue that:
"multinational firms in Austria and Germany are outsourcing the most skill intensive activities to Eastern Europe taking advantage of cheap abundant skilled labor in Eastern Europe. We find that the firms’ outsourcing activities to Eastern Europe are a response to a human capital scarcity in Austria and Germany which has become particularly severe in the 1990s."
Now this finding when I discovered it really rather surprised me, although perhaps, with hindsight it shouldn't have. I had imagined, like many others doubtless also do, that Germany and Austria were outsourcing primarily unskilled, or lower skilled work (this is, for example, the situation in Sweden, see the Becker et al paper referenced below). But then reflecting a little on simple economic theory, and taking on board the fact that both Austria and Germany are now suffering relative shortages of young people, and the huge differential in skilled wages which exist between East and West , then it may well make sound economic sense for German and Austrian companies to employ relatively more intensive quantities (in terms of labour-capital ratios) of relatively cheap skilled labour in the East, and this does seem to be what has been happening.
Corporations’ outsourcing of skill intensive firm activity to Eastern Europe has helped to ease the human capital crisis in both countries. We find that high skilled jobs transferred to Eastern Europe account for 10 percent of Germany’s and 48 percent of Austria’s supply of university graduates in the 1990s.
The Austrian number seems really enormous, the German one less so, but it is still important. In addition Marin produces data which shows that German affiliates in the accession countries were paying (prior to 2004) 17 percent of their German parent wages but were increasing their productivity to 60 percent of the parents’ productivity level. Simple mathematics therefore suggest that they were able to reduce the labor costs by 72 percent relative to their parent-firm cost in Germany.
On examining the pattern of multinational investment and outsourcing across sectors Marin found that German investment was predominantly engaged in manufacturing activity in Eastern Europe (almost 60 percent of total investment), of which manufactured goods and machinery and transport are the most important sectors. She also found that some 90 percent of German investment in machinery and transport were outsourcing (rather than local market oriented) investments.
Marin then went on to look at the levels of skill intensity for outsourced work and asked just how skill intensive the activity undertaken by German affiliates in Eastern Europe actually was when compared to their parent firm activity in Germany. She used two indicators to measure the skill intensity of German affiliates in Eastern Europe:
a) the share of workers with a university or college degree and
b) the share of personnel engaged in R&D or engineering activities in the manufacturing and service sector.
The data she studied suggest that the high-skill ratios of affiliates (the number of university or college workers in percent of total affiliate workers) are 2 to 3 times as large as that of German parent firms in the Eastern Accession Countries. The share of university or college graduates among affiliate workers in Eastern Europe was found to vary between a high of 86 percent (Czech Republic) and low of 8 percent (Slovenia).
The most skill intensive activity was being undertaken by affiliates in the Czech Republic (with a skill share of 86 percent), and Slovakia (skill share of 40 percent). This compares with an average share of university or college graduates of German parent firms of 18 percent only. Thus, measured by the number of university and college graduates, German affiliates in Bulgaria were found to be 12 times as skill intensive than their German parent firms, and affiliates in the Czech Republic 5.5 times as skill intensive. Only affiliates in Hungary were found to have a skill share below that of German parent firms.
A similar picture emerged when she looked at the skill intensity of German affiliates as measured by the share of workers engaged in R&D and engineering. The R&D personnel ratios of affiliates in Eastern Europe ranged between 4.0 percent (Slovakia) and 27.8 percent (Croatia and Russia). This compared with an average R&D personnel share of 13.6 percent of German parent firms. Thus, German affiliates in the Czech Republic are 1.7 times as R&D intensive as their German parent firms.
These are striking and puzzling numbers. German and Austrian multinationals tend to outsource the most skill and R&D intensive activities to Eastern Europe. Why is this happening? Well according to Marin:
Economic theory guides us to look at the factor endowment of these countries for an answer. If countries outsource the most skill intensive activities to other countries, then these countries must be poorly endowed with skills relative to their trading partners.When Germany and Austria’s endowment with skills is compared to Eastern Europe.....we find.....the Baltic States, Russia, Hungary, and Bulgaria are the most skill rich countries as measured by the share of the labor force with a tertiary education level. Germany’s education level lies below the OECD average and roughly matches that of the accession countries average. In particular, Germany is less skill rich than the Baltic States, Russia, and Hungary.In this ranking of countries Austria turns out to be the most skill poor country.
Maquiladoras In Reverse?
Maquiladoras are affiliates of US multinationals in Mexico which specialize in the low skill intensive part of the value chain. Sruggling with the phenomena she found before her, Dalia Marin was lead to ask whether it might in fact not be the case that with the Eastern Enlargement process an inverse Maquiladoras effect was emerging in Germany, since German multinationals are evidently outsourcing to some extent the more skill intensive stages of production to Eastern Europe and retaining the more labor intensive stages of production in Germany. As a result, the relative demand for skilled labor declines in Germany and in this way, outsourcing of high skill intensive activities to Eastern Europe has helps to ease the (partly demographically driven) human capital crisis in Germany. So this may in fact offer us some part of the explanation as to why relative wage for skills in Germany (or skill-bias in wages) has not increased on the back of the information technology revolution of the 1990s since outsourcing activities have removed some of the demand pressure on skills from the German labor market. It may also help to offer some part of the explanation for why hourly wages on aggregate are not rising faster inside Germany itself.
It is important to note at this point that with the shift from an industrially driven economy, to a knowledge-based services one, there is a secular rise in the proportion of higher skilled work which is needed in an economy. So it is not a question of absolute numbers of skill intensive workers declining, but that in Germany these numbers have not been rising as rapidly as should have been the case. The following graph from Alexander Raubold (see link referenced below) perhaps helps make this clearer:
(Please click over graph to read clearly)
Now the above graph illustrates movements in the skill premium and the German labour market over the last 15 years or so. Essentially it shows the ratio of high-skilled to low-skilled wages and employment and the high skilled workers wage bill share in German manufacturing. What can be seen is that over the period from 1990 to 2004 the wages of high-skilled workers remain fairly constant relative to those of low-skilled workers. The right hand axis charts the evolution of the skill premium. What can be seen is that, following a slight peak in 1993, followed by a decline until 1995, there was a slow and steady increase from 1995 to 2004, from an index reading of 160 to 164, but that all in all these changes remain marginal. But when we come to look at employment, the employment of more highly skilled (or non-direct-production) workers increased by 27% over this period, moving from being 48% of the total workforce in 1991 to 64% in 2004.So the real question is: how - given the relative shortages of new skilled labour inside Germany - has this subtantial increase in the skilled labour employment share been possible with such a slight change in the skill wage premium. I think the arguments Delia Marin offers may well provide us with some significant part of the answer.
Now aside from the interesting explanation insight that all this may offer into the dynamics of the German labour market, I would also like to add that the process Marin identifies represents decidedly bad news for those economies which face labour shortages and ageing workforces. Let me explain why. Essentially it has been argued - and standard neo-classical theory indeed anticipates - that tightening in ageing labour markets should lead to rising wages and relative capital deepening (as capital gets substituted for ever more expensive and scarce labour). Now this has always been thought to imply that the society which is subjected to this process would move up the value chain under such pressure, and as such domestic value-added and productivity would increase in a way that meant that living standards (and hence health and pensions systems) could be maintained. Now, if Marin's work proves to be backed by further research findings, I would say we might be seeing the beginnings of another possibility here, one where labour market tightening in some countries leads to skill outsourcing, and to an increase in the relative proportion of non-skilled activity in the ageing home country.
I say IF here, since we obviously need to see more evidence to reach any definitive conclusion. But if confirmed this skill outflow would account for another anomaly: the outflow of skilled workers and inflow of unskilled migrants - which just balance each other - in the German case. Basically it could be hypothesized that you need cohorts of a certain specific weight in your demographic profile - to maintain a natural downward movement on the skill premium across time - in order to ba able to make the knowledge economy transition based on largely domestic labour. Absent this, you seem to spring a leak, and the premium is kept reined-in by an outflow of work to emerging markets where there are bigger younger cohorts, and a more plentiful supply of young workers with the right skill profile. Ironically this then has the perverse effect that there is not enough employment generated for the young skilled workers you actually have, and you get an outflow. It is important to emphasise here that I am postulating that this perverse reverse-Maquiladora effect is posited on two structural characteristics of elderly economies:
a) growing relative shortages domestically in young skilled workers
b) increasing dependence on export driven growth due to weak growth in domestic demand.
This latter point (b) is important since it is the absence of strong growth in domestic demand (most noticeably typified by the absence of housing driven growth) which creates a deficit in certain sectors of knowledge economy services employment which have to be compensated for by dependence on export markets, and a strong tendency towards certain types of outsourcing. In comparison - for example - the US economy has seen a significant drift in outsourcing employment, but the labour market for skilled young workers has remained strong due to growth in the domestic services sector, and indeed the US is a net importer of skilled labour.
Since similar processes MAY also be at work in Japan and Italy, this would seem to be a line of enquiry which is well worth checking out to see if the German (and to some extent Austrian) impacts are replicated.
Population and labour participation in Germany
(Click on the chart for a better view).
Now I have spoken a lot in this post about demographically driven labour market tightening in Germany, but what exactly is the current position in this regard? Well lets start by looking at the above chart which comes from the Federal Statistical Office. The first thing to note is that the German population actually peaked in 2003, and has since been declining. The same also goes for the economically active population. The key point to grasp here is that the potential unemployed population now has a natural tendency to decline in Germany, even with zero economic growth. Obviously, and in particular during 2006 and the first quarter of 2007, the German economy has been growing at what is - by German standards - a pretty high rate, so the natural decline is also accompanied by a real decline produced by increased employment.
The second thing to note about the table is that these are unadjusted data, so to get a real idea of what is happening you need to compare the same quarter from one year to another. Now if we compare, as an example, data for the first quarter, we can see that between Q1 2005 and Q1 2006, the economically active population dropped by some 425 thousand, while unemployment dropped over the same period by some 440 thousand, so effectively there was a only a small decline in effective unemployment (or, if you like a small rise in employment of 20,000 people), despite the sharp fall in the unemployment rate. Now if we come to Q1 2007, we can see that - when compared with Q1 2006 - the economically active population dropped by some 120,000 people (less than in the previous year, presumably reflecting the fact that with the improved labour market conditions more people proportionately remained economically active) while unemployment dropped by nearly 700,000, showing that there was in fact a real and substantial increase in employment in 2006.
The point I want to make here is that while the improvement in employment in Germany in 2006 was real and substantial, with population numbers ticking-on downwards, and hence the economically active population trending down, the "natural unemployment rate" outside of substantial recessions will do so too, regardless of real economic conditions.
Which leaves us with the question as to where the labour force will come from to fuel future economic expansions. This becomes doubly important when you take into account - as I explain in this post over on Demography Matters - that migration flows are now more or less neutral, that is, almost as many people leave each year as enter. Presumably Germany will at some point have to change its immigration policy, but it will be interesting to watch and see just how and when.
German Consumption
Now since I have asserted repeatedly throughout this post that consumption has long been structurally weak in Germany, it would perhaps be interesting to also flesh this part out a bit more (and in doing so I am going to freely draw on work which Claus Vistesen did for this post here).
Now as Claus argues, one of the most striking features of the German economy over the last 25 years - with exception of the post-reunification boom that is - has been the secular decline in the rate of household consumption growth.
The above figure comes from a paper by Adam S. Posen (summarized here by Wolfgang Munchau) and shows the evolution of German household consumtion from 1991 to 2001 - with the exception of the early 1990s re-unification years which are left out in the figure.
Since the time series used ends in 2001 and I we also need to look at the period from 2001 to date to try and get a more complete picture. For this I rely on calculations and estimates made by Claus Vistesen.
my rough calculations on price adjusted private consumption expenditure figures from 2002 through 2006(Q1-Q3) show an average increase in private consumption in percentage change of previous year of 0.14%. However, if we exclude the first three quarters of 2006, during the years 2002 through 2005 Germany actually recorded a slight average decline in private consumption of -0.68% y-o-y. This should perhaps indicate that the impressive year in 2006 needs to be explained by other factors, like forward purchasing as a result of the VAT hike perhaps?
It is also worth bearing in mind here that the OECD private consumption index (2000=100) shows for the same period (02-05) a stagnation in private consumption relative to 2000 PPP figures.
Another issue which arises in this context is the contribution of of domestic consumer demand to GDP growth. This needs to be looked at from two points of view. In the first place there is the contribution made by domestic consumer demand to real GDP growth, and secondly there is the total share of domestic demand (private consumption) in nominal GDP. In terms of the former the IMF paper referred to above offers interesting and relevant data on Germany's export share in GDP growth. In the first place it is important to note that one more time the reunification boom stands out as something of an irregularity in the general trend. This being said, if we examine the chart below we can see that post re-unification, growth in domestic demand has been making a smaller and smaller contribution to overall GDP growth.
As can see from the chart the contribution of demand to real GDP growth has been pretty volatile over the entire time series, but if we factor out the reunification boom domestic demand's contribution to real GDP growth has steadily declined since 1994, and this decline becomes especially noteworthy from 1999 and onwards. In this sense we should be able to see that the emergence of an export driven growth path has become pretty clear. Moreover if we look at calculations provided in the paper from the German national account figures, we find that the total share of private consumption in nominal GDP has fallen to around 60%. In fact Claus's back of the envelope calculations show a 59% share of private consumption in nominal GDP between 2002 and 2006 - a figure which is relatively stable y-o-y; that is to say, the decline is so slight (yet steady) you have to go into decimals in order to track it. This figure is of course in striking contrast to younger societies such as India for example where private consumption accounts for about 70% of GDP but also with economies such as the UK and the US where the consumption share of GDP is much higher than in Germany.
German Trade Evolution
The following chart shows the evolution in German trade from 1995 to 2006. It is extracted from data supplied by the German Federal Statistical Office. The first column shows exports, the second one imports, the third shows the trade balance (exports minus imports), the fourth the % increase in imports from the previous year, and the fifth the % increase in exports.
(Please click over chart to read clearly)
What can be seen from the chart is that the rate of increase in German exports hit a peak in 2000 (coinciding with the internet boom year), crashed and only really started to gather pace again in 2005 and 2006. It should also be noted that in the strong growth years, rates of export growth have been very rapid indeed, hence the 21% growth in 2000, the 9% growth in 2005, and the 16.5% growth in 2006. The interesting question arises, however, as to just how sustainable this growth is in the longer term, in particular given, as we shall see below, the significant impact of exports to the Eastern European countries, and continuing doubts as to just how long the rapid rates of growth being seen there can continue, given the labour supply constraints they are about to face.
Main Destinations For German Exports
The following chart shows the principal destinations for German exports (by percentage share), and the evolution of each destination over the 1995 to 2005 period.
(Please click over chart to read clearly)
The above chart is, in fact, really interesting, since, for all the talk in the press about the growth in exports to China and other third world emerging markets (and these of course have been growing very rapidly of late) due to the low base from which such exports start, the real impact on German growth is limited. Exports to the US, other old EU countries AND to the new Eastern Europe Accession countries, on the other hand, are all comparatively important. Exports to the new EU countries in 2005, for example, represented 8.6% of all German exports, which compares with a figure of 11% for ALL Asia.
Now if we look at the chart below, which shows the top twenty sources of German imports and destinations for exports in 2006 (in value terms, millions of euros) we can also find some surprises. Like, for example, the fact that exports to the Czech Republic alone were not that far short of exports to China despite the huge difference in the relative sizes of the countries. Exports to Poland were in fact greater than exports to China. So I think this chart really gives us a much clearer perspective on things, and enables us to see just how Germany might be sensitive to a growth slowdown in Eastern Europe.
Some indication of the scale of importance of Eastern Europe can be found from the latest edition of the BIS quarterly review (summarised here by Bloomberg), which informs us that:
"Investment and lending have boomed in eastern Europe, pushing up wages and spurring consumer spending, as eight nations joined the European Union in 2004 and a further two followed this year. More than 60 percent of new credit to emerging markets went to European countries in the last three months of 2006, the BIS said today in a quarterly report."
Now a phenomenon which is accounting for 60% of new emerging market credit seems to me to be a pretty important one, and Eastern Europe as such seems to form a relatively important part of the current momentum in global growth, all of which leads us to ask what the impact on Germany will be when all of this eventually slows. Clearly India and others are now coming, so there will be new opportunities, but will German exports be able to retain their relative hegemony in these new markets? This, I think, is an important question.
(Please click over chart to read clearly)
Co-variation of German Balance of Payments Surplus and GDP Growth
The graphs below - which show the evolution of GDP growth and balance of payments surplus as a % of GDP over the years between 1990 and 2004 - offer us some more evidence for what export dependence means. While the correlation is far from exact, a certain relation can clearly be observed, with GDP expressing a lagged drop subsequent to declines in the level of the BoP surplus (thanks to Claus Vistesen for this). So someone somewhere should be able to develop a "sensitivity index" from all of this.
GDP and Exports Co-Variance
Reinforcing the above the next graph below shows % changes in both GDP and exports on an annual basis between 1995 and 2006 (thanks again to Claus Vistesen). Again (and with a lag) GDP growth seems to follow movements in the growth in exports. It is also worthy of note how the rapid decline in the rate of export growth following the bust in the internet in 2001 is followed by a protracted period of low GDP growth.
I think what both the above graphs clearly suggest is a susceptibility of the German economy to any slowdown in the rate of growth in global trade, and this simple fact alone should help us put some sort of perspective on those claims that the current German recovery may become self sustaining.
Bazaar Economy Hypothesis
Finally I would just like to touch on the so called "Bazaar Economy" hypothesis. This hypothesis is evidently also associated with Dalia Marin's idea of the operation of a reverse Maquiladoras effect in the creation of new product chains. As such it is associated with a growing value - and skill - component in outsourced intermediate activities. The following chart - which shows the evolution of domestic value added and imported inputs for the export sector since 1995 - shows the process at work:
(Please click over chart to read clearly)
As the authors of the IMF study argue that such a picture, together with the econometric results they obtain, constitute an "intuitively appealing" initial confirmation of the Bazaar thesis, and at the very least suggest that this is an area in need of continuing research:
An important contribution of the paper is its attempt to test whether Germany’s export growth was linked to the emergence of new production chains (Marin 2005). Following a well known literature (e.g. Sinn 2005, 2006) the paper argued that the fall of value added in Germany’s export sector reflects a growing share of traded intermediate inputs in the production process. From this perspective, the empirical link between value added and export growth can be viewed as evidence for a more decentralized production process. This interpretation also helps explain why the recent surge in exports did not translate into a significant employment growth in German industry (Becker and others 2005). While this finding is intuitively appealing, the empirical evidence is only indirect and further research is needed to confirm this result.
Summing Up
In this post I have examined some of the structural characteristics of the German economy in the light of certain stylised facts about the recent wave of global growth and the apparent structural dependence of elderly economies (median age 41+) on exports for growth. We have been able to see how growth in German GDP is somehow structurally linked to growth in world trade thanks to export dependence, and that in this whole picture the new EU Accession economies play an important strategic role. We have also seen how weaknesses in the volume of human capital entering the German labour market may well have been decisive in determining a high skill component in the outsourcing practices of German firms, with a consequent long term impact on the aggregate levels of German wages and salaries. We have also noted that this latter effect becomes rather preoccupying when it is considered that for a proportionately smaller workforce to support a proportionately larger elderly dependent population what is needed is more (and not less) value added per worker.
Sources
What Explains Germany’s Rebounding Export Market Share?
Stephan Danninger and Fred Joutz
IMF working paper WP/07/24
Overall Development in Foreign Trade 1950 - 2006. German Statistical Office.
Order of Rank of Germany's Trading Partners. German Statistical Office.
German exports in April 2007: +13.1% on April 2006,German Statistical Office, 8 June, 2007.
Labour costs in the first quarter of 2007 and in an EU-comparison for 2006, German Statistical Office, 8 June, 2007.
Is Human Capital Losing from Outsourcing? Evidence for Austria and Poland
Andzelika Lorentowicz,Dalia Marin, Alexander Raubold: University of Munich, Department of Economics, Discusion Paper
A New International Division of Labor in Europe: Outsourcing and Offshoring to Eastern Europe Dalia Marin GESY Discussion Paper 80, September 2005
Impacts of outsourcing on Germany and Austria's human capital, Alexander Raubold. Phd Thesis. Munich.
‘A Nation of Poets and Thinkers’ - Less So with Eastern Enlargement? Austria and Germany, Delia Marin, University of Munich, Department of Economics, Discussion Paper 2004-06.
Location Choice and Employment Decisions: A Comparison of German and Swedish Multinationals
Sascha O. Becker and Karolina Ekholm, Working Paper August 2005
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