Socio-Economic Review Advance Access originally published online on October 14, 2008
Socio-Economic Review 2009 7(1):67-99; doi:10.1093/ser/mwn021
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This article appears in the following Socio-Economic Review issue: SPECIAL ISSUE: Changing institutions in developed democracies: economics, politics and welfare [View the issue table of contents]
German economic performance: disentangling the role of supply-side reforms, macroeconomic policy and coordinated economy institutions
1 Department of Economics, University College London, UK and CEPR
2 University of Oxford and Nuffield College, Oxford, UK
3 Department of Political Science, Duke University, Durham, NC, USA
Correspondence: w.carlin{at}ucl.ac.uk
Since unification, the debate about Germany's poor economic performance has focused on supply-side weaknesses, and the associated reform agenda sought to make low-skill labour markets more flexible. We question this diagnosis using three lines of argument. First, effective restructuring of the supply side in the core advanced industries was carried out by the private sector using institutions of the coordinated economy, including unions, works councils and blockholder owners. Second, the implementation of orthodox labour market and welfare state reforms created a flexible labour market at the lower end. Third, low growth and high unemployment are largely accounted for by the persistent weakness of domestic aggregate demand, rather than by the failure to reform the supply side. Strong growth in recent years reflects the successful restructuring of the core economy. To explain these developments, we identify the external pressures on companies in the context of increased global competition, the continuing value of the institutions of the coordinated market economy to the private sector and the constraints imposed on the use of stabilizing macroeconomic policy by these institutions. We also suggest how changes in political coalitions allowed orthodox labour market reforms to be implemented in a consensus political system.
Key Words: economic performance • economic reform • capitalism • varieties of • collective bargaining • Germany • United Kingdom