Declining America like Ottoman Empire - Eamonn Fingleton
Eamonn Fingleton's website is back.
(1) Declining America like Ottoman Empire - Eamonn Fingleton
(2) Myths of the Japanese Economy - Eamonn Fingleton
(3) German economic model doing well - Eamonn Fingleton
(4) Eamonn Fingleton Reviews Pat Choate's Dangerous Business: The Risks of Globalization for America
(1) Declining America like Ottoman Empire - Eamonn Fingleton
Lessons from the Sublime Porte: How to Lose an Empire
Current U.S. trade policies were first tried by the Ottoman empire. America's decline is proceeding even faster.
By Eamonn Fingleton
[Article first published in the August 2010 issue of The American Conservative]
Here's an economic history test:
1. Which Great Power pioneered the secular trend towards freer international trade?
2. Which Great Power first resorted to spiraling foreign indebtedness to pay for its wars?
3. Which Great Power first permitted large-scale foreign direct investment in its domestic industries and infrastructure?
If you guessed such latter-day globalizers as the United States or Britain, you flunked. The correct answer in each case is the Ottoman Empire.
During much of its existence of more than six centuries, the empire arguably ranked as the world's top power, but this did not stop its eventual collapse in 1922-23. For anyone concerned about America's future, the implications are thought-provoking. Indeed, in many ways America's current trajectory seems like a speeded-up version of the Ottoman movie.
Although the Ottomans were never as rabidly ideological in their trade views as the editorial board of the Wall Street Journal, they diverged sharply from the systematic mercantilism that marked the rise of Europe in early modern times. Their import tariffs were relatively low, and Ottoman policymakers took a "don't worry, be happy" view of the empire's rising trade deficits in the mid-19th century. In so doing, they eerily anticipated similar insouciance in Washington in the last three decades.
Of course, the analogy should not be pushed too far. Trade was not the only factor in the empire's ultimate fate. A particularly problematic political culture bears much blame. Although the Ottoman sultanate functioned much like the monarchies of early modern Europe, there was one important difference: the Ottomans did not believe in primogeniture. After a reigning sultan passed on, it was not just brother against brother but brother against half-brother, with various mothers and other female partisans pulling strings from behind the harem curtains.
The process by which Selim I succeeded in 1512 was especially memorable. He felt it necessary to kill not only all his brothers but all their sons. Nothing if not thorough, he went on to grease the skids for Suleiman, the ablest of his own sons, by killing the latter's four brothers. Selim was to become known to history as Selim the Excellent and his son as Suleiman the Magnificent. So much for Ottoman civilization at its apogee.
As the years went by, the more bloodcurdling aspects of the Ottoman political tradition were reined in, but even as late as the mid-19th century, the empire's administration remained unaccountably and, far too often, capriciously, authoritarian. Meanwhile, the lack of a primogeniture tradition proved a stumbling block in a different way: by retarding industrial development. In Europe, a company founder typically bequeathed his business in its entirety to his eldest son, but successful Ottoman businessmen often divided up their businesses among many heirs. Whatever else might be said about the European practice, it was more conducive to the emergence of massive, often globe-spanning, corporations.
Such nuances aside, several aspects of the Ottoman approach to economics seem highly relevant to recent American experience.
By the early 1840s, the Sublime Porte, as the Ottoman government in Istanbul had become known, had signed what amounted to one-way free-trade agreements with several of the European powers. It renounced its right to levy anything more than nominal tariffs on imports, yet secured no similarly favorable treatment for its own exports in return. The parallel with Washington's post-World War II trade diplomacy in East Asia is hard to miss.
The agreements set in stone the Ottomans' longstanding import-friendly tradition. Timing was crucial: the Ottomans contrived to have their hands tied just as international trade was moving decisively to the fore as a determinant of a nation's economic performance. Previously, in an era of craft industries and generally prohibitive transportation costs, trade had played a minor role, particularly in the case of larger nations. By the 1840s, the Industrial Revolution and the concommitant development of more efficient transportation methods had transformed manufacturing economics: suddenly economies of scale assumed a mission-critical role. Thus those nations that contrived, by hook or by crook (not least by skillful or coercive trade diplomacy), to find the largest possible markets for their industrial products enjoyed a distinct advantage. Such nations notably included Britain, which notwithstanding its later Pauline conversion to free trade deployed intelligently conceived protectionist methods to jump-start new industries in the most dynamic phase of its rise in the first half of the 19th century.
Ottoman officials discovered too late that they had painted themselves into a corner. As cut-price imports flooded in from Europe's increasingly efficient new factories, the empire was prohibited from using high tariffs to build its infant industries. For the first time in its history, the empire's trade plunged deeply into the red. The situation deteriorated so rapidly that by 1854, the Sublime Porte was forced to seek help abroad in the form of a loan raised in London.
It was the first foreign loan in the empire's history, but soon foreign borrowing became a way of life. Then, with its bargaining position severely weakened by chronically poor trade performance, the empire was pressured in 1881 into handing over almost complete control of its remaining tariffs to European officials. European investors were granted a major role in running Ottoman industries, most notably tobacco, and developing railroads and other modern infrastructure. Basically the Sublime Porte had lost control of its destiny.
Trade apart, the empire's outsize military expenses hastened the outcome. Indeed, seen from the vantage point of the 21st century, the empire's history seems to have consisted of little more than war. And it was the need to finance its participation in the Crimean War— which broke out in 1853 and is widely considered the first modern war—that proved the last straw in forcing a resort to the London financial markets.
The parallel with the United States is hard to miss: after all, since the 1930s, there has been only one decade—the 1980s—in which the United States has not been involved in at least one significant war. Except for World War II, moreover, these wars have seemed at best only tenuously connected to America's vital interests. Worse, they have tended gratuitously to undermine the nation's economic fundamentals.
By comparison, the Ottomans at least seemed to have had some reason to go to war. In entering the Crimean War, for instance, the empire was responding to a Russian attack on its territory.
What is clear is that military activities constituted an increasingly onerous burden for the Ottomans from the 1850s onward. As documented by Murat Birdal, author of a new book on late-era Ottoman finances, military needs were behind major foreign issues of bonds in 1877, 1888, 1896, 1905, 1913, and 1914. Meanwhile, other bond issues were constantly required merely to repay debt incurred in funding earlier military activities.
Again the parallels with America's recent history are striking: a key reason Washington has become increasingly indebted to Japan, China, and Germany in the last 30 years has, of course, been the financial burden of defending a vast quasi-empire at a time when the export industries have faltered.
Perhaps the most egregious parallel between Istanbul then and Washington today is in the treatment of exporters. Far from encouraging them, the Ottoman Empire seemed to go out of its way to hobble them with special tariffs on exports. Of course, such tariffs had been a common feature of the tax systems of many nations in preindustrial times. (They had the virtue of being relatively easy to collect.) But they had been abandoned by more enlightened governments as the Industrial Revolution began. In the Ottoman Empire, by contrast, they continued to be levied for nearly a century longer. Ottoman officials did not come to appreciate the full implications until the empire had fallen far behind the European powers in industrial prowess.
As for the United States, there may be no special taxes on exports these days, but, all but overlooked by most observers, the U.S. tax system nonetheless contains a hidden and quite marked anti-export bias. As economic commentator Pat Choate pointed out in his 2009 book, Saving Capitalism: Keeping America Strong, this stems from the fact that while most other advanced nations have abandoned sales taxes in favor of a value-added tax, sales taxes persist as a central pillar of U.S. taxation. The interaction between the two systems puts American manufacturers, and particularly those who export, at a significant disadvantage. This reflects the fact that, whereas in VAT systems, manufacturers are granted rebates on exports—this is legal under World Trade Organization rules—no similar break is available under a sales-tax system. The effect is that American exports contain a "baked-in" element of sales taxes that, particularly in the case of price-sensitive products, can be a decisive disadvantage in global competition.
So much for the parallels between the Ottoman Empire and the United States. Now for a difference: the speed of financial implosion. This has been astoundingly faster in America's case. After all, it seems only yesterday that the United States bestrode the world as the greatest creditor nation in history. With hardly a second thought, the U.S. government not only found the money—entirely internally, of course—to fund the massive rearmament program that won World War II, but afterward advanced huge sums to jump-start other major nations' postwar recoveries. Thereafter, until well into the 1960s, the American economy remained so strong that the cost of maintaining a vast global network of military bases seemed readily manageable.
By the 1970s, however, the bloom was off the rose: a trade crisis in 1971-72 forced the United States off the gold standard, and the U.S. Treasury began to rely ever more heavily on foreign money to fund its deficits. A decade later—in the last years of the Reagan administration—the United States had become the largest debtor nation in history. And that was still in the good old days when American policymakers continued to harbor hopes of eventually stopping the rot. Since then, on the strength of catastrophic policy mistakes by Bush I, Bill Clinton, and Bush II, the situation has spun completely out of control.
Not to put too fine a point on it,we are probably witnessing the fastest economic implosion of a major nation in history. By comparison, the pace of Ottoman decline was gentle. As measured both by its geographical reach and its relative technological sophistication, the empire probably peaked as early as the latter half of the 16th century. For a long time thereafter, its decline remained almost imperceptible, not only to its own subjects but even to well-informed diplomatic observers. At least where military technology was concerned, the empire remained a first-rank power into the early decades of the 19th century. As late as 1829, it launched the Mahmudiye, which for many years held the record as the world's largest warship. The first indisputable indication that the empire was in trouble did not come until the 1854 decision to borrow abroad. This was more than 250 years after the empire had reached its apogee. The United States "accomplished" a similarly melancholy transition from global leadership to overt financial dependency in little more than one-tenth the time.
Perhaps the most worrying aspect of America's situation is the extent to which U.S. export industries have become hollowed. One number sums up the problem: as of 2008, the last "normal" year before the global financial crisis distorted everything, the U.S. current account deficit came to 4.9 per-cent of GDP, up from 1.9 percent in 1989. Although full figures are not available, it seems clear that the Ottoman Empire began incurring trade deficits on America's recent scale only in the final decade before its ultimate collapse.
Eamonn Fingleton is the author of In the Jaws of the Dragon: America's Fate in the Coming Era of Chinese Dominance.
(2) Myths of the Japanese Economy - Eamonn Fingleton
Myths of the Japanese Economy
Press coverage of the Japanese economy has never been more misinformed.
By Eamonn Fingleton
(This article first appeared in the magazine of the Foreign Correspondents' Club of Japan.)
Former Tokyo correspondents held a reunion at the Overseas Press Club in New York in March at which I was a speaker, and, as Number 1 Shimbun has already reported, I was less than flattering about recent coverage of Japan. On the principle that it is as well to be hanged for a sheep as a lamb, I herewith offer more detail on my strictures.
Although in the space available I cannot do a comprehensive job of debunking conventional coverage (for more details, see my books), I list below six myths that can be readily disposed of in a few sentences.
MYTH 1: THE JAPANESE CONSUMER IS ON STRIKE
All talk of a consumer strike to the contrary, Japan’s consumption rate has actually risen – and risen significantly – over the years. This is implicit in the fact that the household savings rate fell from 15.3 percent in 1989 to 3.1 percent in 2007. As every economist knows, savings and consumption are opposite sides of the same coin; other things equal, every yen by which the savings rate falls is an extra yen of consumption.
If the Japanese consumer were really on strike, you would surely see the impact in weak sales of consumer durables such as electronic gadgets. Yet the Japanese have been consistently among the world’s earliest adopters of succeeding generations of such gadgets, including advanced mobile phones, large flat-panel screens, high-definition video, laptop computers, fast Internet connections and digital cameras. Meanwhile, the Japanese are driving far larger cars than before the bubble burst, and much better-equipped ones. Look how fast the Japanese were to adopt car-navigation devices, for instance.
Even measured in more traditional terms, Japanese consumers are no slouches. In the view of Paris-based fashion arbiter Suzy Menkes, they are the world’s best-dressed people. Thanks to increasing consumption of ever-more sophisticated healthcare services, they have added nearly two years to their life expectancy since the 1980s. Then there is the Japanese approach to food. If Japanese diners are really such miserable, self-denying scrooges, how come Tokyo, at last count, boasted no less than 11 Michelin three-star restaurants, versus just four in New York?
MYTH 2: THE JAPANESE ECONOMY HAS SUFFERED A “DEFLATION DISASTER”
Yes, there has been deflation. But, no, it is not a disaster. Far from it; it is testament to a huge, extremely welcome and laudable leap in manufacturing productivity.
All but forgotten these days, there is more than one kind of deflation. The true precedent for Japan’s current price pattern is not the 1930s, but rather the 1880s and 1890s – decades when the United States went from being a rural backwater to the world’s largest and most successful economy. The trend was driven by a huge productivity leap in the steel industry, where prices fell fully 90 percent. Lower steel prices fed through to other industries, and this, combined with a general improvement in manufacturing techniques, precipitated remarkable cuts in consumer prices. Manufacturers gnashed their teeth, but for consumers it was a bonanza.
Similarly, in recent years a huge productivity leap in electronics has driven price cuts across a wide front in Japan, not only in consumer goods, but in services as well. Although at the consumer level the trend reflects lower prices for imports of finished goods from China, the main driver is the success with which Japanese suppliers of advanced components, materials and production equipment have been moving to ever-more sophisticated production technologies. The productivity leap is nicely exemplified in a tiny electronic stopwatch I bought the other day. The price: ¥105. Twenty years ago I might have paid ¥1,000 and 40 years ago, when the nearest equivalent would have been a traditional mechanical instrument, more like ¥10,000.
MYTH 3: THE JAPANESE EMPLOYMENT SYSTEM IS BREAKING DOWN
What? Again? This story has been a mainstay of misinformed Japan coverage since before many of today's correspondents were born. Of course, it seems to make sense. Once one employer reneges on lifetime employment, the logic of competition will, it is assumed, compel rival employers to follow suit. Thus, in an age of increasingly free markets, it seems natural to assume – as generation after generation of Tokyo correspondents have done since the 1960s – that the Japanese system cannot survive much longer. Natural, but wrong.
Correspondents make a crucial mistake in taking the term "lifetime employment" literally. There has never been a time when the general run of jobs was guaranteed for life. The system has always been based on what veteran British Japan watcher Ronald Dore long ago termed "flexible rigidities." Although the system aims to provide stable employment, employers enjoy plenty of leeway to lay workers off in the face of secular changes in production technologies and consumer preferences.
Lately we have heard much about so-called "freeters," the fashionable new term for temporary workers. Supposedly such workers are a new factor. Nothing could be further from the truth. As recorded by the author Mamoru Iga back in the boom year of 1986, already then between 80 and 85 percent of the labor force comprised subcontracted or temporary workers who enjoyed no special job security. Although the range of jobs freeters are permitted to do has been widened over the years, the system generally functions much as it did decades ago.
Of course, a question remains: Why don't Japanese employers cut loose from all "rigidities" and embrace full-blooded Anglo-American hire-and-fire? In reality, they are tightly constrained by government "guidance." Even in bad times, large and solvent employers are under considerable pressure to avoid mass firings, and if they pressed ahead regardless, they would be cut out of the loop on the many ways the government – via the allocation of public contracts, for instance – can quietly pass along favors to those on its approved list. Basically the lifetime employment system is not "tradition" at all, but policy, and it is set at the highest levels.
Why doesn't corporate Japan challenge all those inaccurate reports of the system's breakdown? For the very good reason that it has come to rely on millions of easily fired workers in foreign subsidiaries as the swing factor in recessions. Such workers might be less willing to play sacrificial lambs if they knew how much greater job security their Japanese counterparts still enjoy.
MYTH 4: AN AGING JAPAN IS FACING A DEMOGRAPHIC DISASTER
Some disaster. A large part of the aging "problem" is simply that the Japanese are living longer. In 1947, Americans lived more than 15 years longer than the Japanese. Today, having increased their life expectancy at birth by nearly 30 years, the Japanese live five years longer than Americans.
As for Japan's low birthrate, this again is not a problem. Rather it is a solution. Whereas in the 1930s Japanese leaders had resorted to foreign conquest to feed the nation's then-exploding population, in the late 1940s they set to work to slash the birthrate. The Eugenic Protection Act of 1948, as amended in 1949, legalized abortions and made sterilization and other forms of birth control universally available. As recorded by Encyclopaedia Britannica, abortions rocketed from 246,000 in 1949 to more than 1.17 million in 1955.
Of course, today's low birthrate is not without disadvantages, and certainly there will be a dearth of worker-age Japanese citizens in coming decades. But corporate Japan's hiring catchment area these days is hardly limited to the home population. Quite the contrary; there are huge pools of workers in East Asia, Europe and the Americas from which to hire. In any case, older Japanese are well-insulated from financial distress thanks to the nation's vast accumulation of overseas investments (on a per-capita basis Japan's net overseas assets are probably the largest in real terms of any major nation in history).
All this has not stopped some Japanese commentators suggesting the Japanese are becoming "extinct." Will it come to that? Hardly. Certainly if policymakers want to reverse the trend, they have plenty of hitherto untapped remedial measures available. For a start, they could loosen zoning controls and thereby give young couples more space to bring up families. The fact that they have made no serious attempt to do so is a clue to their true mindset – given that Japan remains one of the world's most densely populated nations (and ranks No. 1 as a food importer), policymakers seem to think it is not yet time to call a halt to the low birthrate policy.
MYTH 5: JAPAN'S GOVERNMENT FINANCES ARE OUT OF CONTROL
As officially stated, Japan's ratio of public debt to GDP is one of the world's highest. It does not follow, however, that the government's finances are out of control. A closer look suggests a different view. Remember that borrowing is not necessarily a bad thing. It depends how the money is used. In Japan's case much government borrowing is being applied to investment rather than consumption. Most obviously the Japanese government has been investing abroad, not least in the United States. In fact the Japanese government is the largest holder of U.S. Treasury bonds. Basically it is borrowing from Japanese savers to finance American profligacy, not the domestic variety. If the financial markets were really spooked, Japanese interest rates would long ago have rocketed. In reality they remain among the world's lowest.
MYTH 6: THE JAPANESE GOVERNMENT BUILDS A LOT OF "BRIDGES TO NOWHERE"
Actually, true genius would be required to do this. Not only is Japan among the world's most densely populated nations, but it suffers a general shortage of roads, and thus by implication bridges. A new bridge almost anywhere in Japan immediately attracts plenty of traffic because it can be counted on to provide many road users with not only a more direct route, but often a less jammed one. The bridges-to-nowhere story got started when a British magazine in 1998 wrote about the opening of the magnificent Akashi Kaikyo Bridge. The headline ran, "The Bridge to Nowhere in Particular." The magazine failed to notice that, via the small island of Awaji, the bridge forms one of only two road crossings between Honshu and Shikoku. To say the least, the 4.1 million residents of Shikoku don't think they live "nowhere."
(3) German economic model doing well - Eamonn Fingleton
Germany: The Big Engine that Could
When the global economic crisis began in 2008, many commentators predicted Germany would be among the worst hit. In reality, Germany has excelled not only in maintaining high levels of employment but strong exports.
By Eamonn Fingleton
[This article was first published in the March 2010 issue of The American Prospect.]
American and British commentators have told three stories about the German economy over the past decade, all of them derogatory. Articulating a standard conservative view, Adam Posen of the Peterson Institute for International Economics in 2006 characterized Germany's performance as "lastingly poor." In a similar vein, Jude Blanchette, blogging for the libertarian Mises Institute, predicted in 2003 that nothing but "rot and indolence" lay ahead.
Another version of the indictment states that even though Germany was once an economic powerhouse, its best days are over. Thus in 2003, Larry Elliott of The Guardian reported that the German economy had "sputtered to a virtual halt" and, in the view of many, had succeeded to Britain's 1970s-era role as the "sick man of Europe."
A third story holds that, to the extent Germany is surviving at all, it is only by giving up the distinctive elements of its economic model and embracing American norms. Edmund L. Andrews, for instance, claimed in The New York Times in 2000 that "the structure and ethos underlying Fortress Germany have begun to crack like a house on a California fault line." Supposedly the Germans were taking a leaf out of Silicon Valley's book by moving to a freewheeling employment model, and many recent university graduates were forsaking a secure, carefully nurtured career with a long-established employer for a bumpier ride with an entrepreneurial start-up.
Yet, as the Chicago-based Germany-watcher Gary Herrigel points out, none of this is true. "The Germans have certainly reformed their system to make it more flexible," he says. "But they have had no intention of adopting the American model. They have not been moving in the direction of more free-market mechanisms or the individualization of the economy."
It is high time the German economy got some respect. It has been faring much better lately than either the United States or Britain, despite the scornful predictions of Anglophone economic observers. The problems attributed to the German economic model since reunification have been greatly exaggerated, if not entirely imaginary, and German corporations are now exceptionally well positioned to capitalize on recovery once global demand picks up. The rest of the world can learn vital lessons from this success through good global economic times and bad.
The case against the German model relies largely on one data point: Germany's official growth rate has often lagged in recent years. But the growth story is more nuanced than most English-speaking observers have realized. And by virtually every other measure, the German economic model stacks up well against that of the United States:
Per-capita income. Measured at ruling exchange rates as of 2008, Germany's per-capita income was $44,600. That was within hailing distance of America's $47,500 -- an impressive performance in itself and all the more so when you realize that the typical German worker put in just 1,432 hours in 2008 versus 1,792 hours for the typical American.
Life expectancy. Germans now live nearly 14 months longer on average than Americans. By contrast, as recently as the early 1980s, life expectancy in the former West Germany trailed the United States by fully 17 months (and, of course, East Germany was even further behind). A nation's life expectancy is a function of several key aspects of national well-being, and as such it is a useful reality check on purely money-based economic rankings. In particular, it tests a nation's ability to provide its citizens with decent health care.
Trade. Germany's trade performance over the longer term has been nothing short of spectacular. From 1998 to 2008 the German current account went from a deficit of $5.9 billion to a surplus of $267.1 billion. The contrast with the United States could hardly be starker: The American current account deficit shot from $233.8 billion in 1998 to $568.8 billion in 2008.
Innovation. Germany is a leader in key new technologies, including renewable energy such as solar and wind power. Germany is also the political and economic driving force behind the Large Hadron Collider, the huge new European particle accelerator that is exploring some of the most fundamental questions in physics, and the resulting breakthroughs should redound disproportionately to Germany's advantage.
Jobs. Even in the case of unemployment -- a yardstick that for most of the two decades since reunification had been a major embarrassment for Berlin officials -- Germany is now doing better than many other nations. As of December 2009, the jobless rate, at 8.1 percent, was well below America's 10 percent.
The idiosyncrasies of the German economic model are striking and in many ways, make it seem behind the times. Few Germans own credit cards, and cash is still king. Then there is the somber German Sabbath. Thanks to a powerful alliance of labor unions and religious conservatives, most stores remain closed on Sunday.
Even when the stores are open, their pricing is not always a case study in efficient markets. The other day in Berlin, for instance, I noticed that a 100-tablet pack of aspirin cost 15.95 euros. For this sort of money -- about $23 -- you can buy more than 20 times as many tablets in the States. American expatriates in Germany complain of a long list of similarly inflated prices for everything from guitar strings to Ziploc bags.
Such divergences from American expectations are merely the surface manifestations of a radically different economic culture. The German economy has succeeded because it remains decidedly German. That begins with the close relationship -- too close, in many American eyes -- between German banks and German industry. In the so-called hausbank ("house bank") system, most corporations have a long-standing, largely exclusive arrangement with one main bank. The hausbank owns significant stakes in many of its corporate customers and thereby exercises considerable behind-the-scenes influence.
Admittedly, the hausbank system is not as all-encompassing as it once was. In an effort to minimize conflicts of interest in its investment-banking operations, Deutsche Bank in particular divested key shareholdings some years ago. But as the Göttingen-based scholar Andreas Busch has pointed out, the significance of Deutsche Bank's policy change has been exaggerated in the English-language press. "One swallow does not make a summer," he says. "Deutsche Bank does not figure as large in the German economy as many foreign observers imagine. The burden of proof here lies with those who argue that the core of the system has been hit." He adds that the hausbank system is still central to the financing of many small and medium-sized enterprises (what in German are known collectively as the mittelstand). On Busch's figures, the mittelstand accounts for 70 percent of employment and about half of the total output of the enterprise sector.
Then there is Germany's notably labor-friendly employment system. Despite some regulatory relaxation in recent years, German workers enjoy much greater job security than do their American counterparts. As Herrigel points out, even in the midst of the current downturn, which has proved temporarily devastating for many manufacturing companies, there have been remarkably few layoffs. Instead, Germans have moved toward work-sharing via the kurzarbeit (literally, "short work") system.
Labor also enjoys a powerful voice in Germany's two-tier boardrooms. In the case of the largest corporations, half of all seats on the supervisory board are reserved for employee representatives. In most cases one of these employees is a management nominee, but the others are genuine employee representatives. Labor enjoys considerable veto power, and on key issues, its wishes can be overridden only if management and shareholders forge a completely united front. The board oversees and appoints a management board that runs day-to-day affairs.
As viewed by orthodox American economists, the patients are running the asylum. But few aspects of the German model seem more secure than this system of co-determination in corporate governance. German corporations have consistently increased their global market share over the years. In the steel industry, for instance, ThyssenKrupp now outproduces United States Steel 3 to 1. In the electrical industry, Siemens is a bigger exporter than ever, while General Electric long ago shuttered most of its American factories in a controlled retreat into outsourcing and diversification.
Then there is Germany's performance in the automobile industry. Volkswagen, Mercedes-Benz, Porsche, and BMW remain at the top of their game, even as Detroit has been brought to its knees. In the last year, a German government "cash for clunkers" program -- the model for the U.S. program introduced last summer -- proved highly effective in supporting domestic demand. In export markets the German carmakers really show their mettle. In a normal year, BMW, for instance, sells three times as many cars abroad as at home. Overall, the German industry accounts for a global market share of about 17 percent -- not bad for a nation with just 1.2 percent of the world's population. Admittedly, about half of German-brand cars are produced in foreign assembly plants, but such plants rely heavily on German-made components.
Even in services, where the American model is supposedly indisputably superior, German corporations don't seem at a serious disadvantage. In the airline industry, for instance, Lufthansa is still airborne after more than 80 years, while its once much larger and more powerful American rivals on the Atlantic route, Pan Am and TWA, have long been grounded. Lufthansa ranks sixth in the world in passenger miles and has been expanding by acquisition in Austria, Switzerland, Britain, Belgium, and the U.S. (where it has bought a 15.6 percent stake in JetBlue).
To be sure, not everything has been going swimmingly for the German economy. In particular, the German banking system has hardly emerged unscathed from the recent global financial earthquake. But how could it? After all, Germany now ranks second only to China among the world's capital-exporting nations. In that capacity it has had to recycle vast funds into capital-importing nations, including the two largest and most profligate, the United States and Britain. Given that both nations are suffering their worst financial strains since the Great Depression, Germany could not realistically have walled itself off from the world financial crisis. But the German banking system's domestic operations have remained relatively healthy. The two notable bank meltdowns -- Bayerische Landesbank and Landesbank Baden-Württemberg -- were caused by problems largely incurred abroad, in the American sub-prime mortgage market in the former case and in the derivatives market in the latter.
Of course, for all Germany's success by other measures, it has lagged in growth of gross domestic product. Between 1998 and 2008, it grew in real terms by an average of just 1.5 percent a year. By comparison, the United States grew by fully 2.6 percent. But these numbers are not meaningful without considerable adjustment. GDP growth is a function not only of rising output per capita but of population growth. Much of America's growth between 1998 and 2008 came from a cumulative population increase of 13 percent. By contrast, Germany's population rose by less than 0.3 percent. (Though American conservatives like to lambaste Germany for its super-low population growth, many Germans take the view that, in a world of scarce resources, slow population growth is less a curse than a blessing.)
Clearly we have to adjust for the population effect. When we do, we discover -- confoundingly, for American orthodoxy -- that on a per-capita basis Germany actually very slightly outperformed the United States between 1998 and 2008 (with growth averaging just less than 1.5 percent versus America's less than 1.4 percent).
For close observers like Herrigel of the University of Chicago, Germany's performance over the last decade has always seemed more solid than that of the United States. "The task of calculating U.S. growth in recent years has been greatly distorted by the financial bubble," he says. "Germany's growth has been a lot more healthy, and the wealth created has been much more sustainable."
For two decades now, German policy-makers have been wrestling with one of the most perplexing challenges in economic history: how to integrate the backward states of the old East Germany into a highly advanced First World economy. Along the way the authorities consciously chose to let economic growth take a backseat as they battled pressing political concerns. Most obviously they opted at the outset in 1990 to value the old East German mark at a 1-to-1 parity with the West German mark, fully aware that the consequence would be long-term unemployment in the East. But the decision achieved a crucial immediate political objective in forestalling a sudden, potentially highly destabilizing population lurch from East to West. The skills that older East German workers were equipped with, however, were useless in an advanced First World market economy and, with no case for paying such workers anything like West German wages, unemployment remained high for years. If any advanced nation has had an excuse for a subpar economic performance, it has been Germany.
Yet today, Herrigel says, "I have traveled very extensively in the country and it is everywhere very, very prosperous. There are no pockets of extreme poverty such as we have on Chicago's West Side. Many parts of America have conditions more like those in developing rather than developed economies."
The secret of the German system's success is, in large part, a strong national commitment to advanced manufacturing. At last count the industry still made up about 20 percent of Germany's total output, compared with little more than 11 percent in the United States. The pivotal significance of a strong manufacturing sector is understood by virtually all thoughtful Germans even if it is scorned by many of America's most influential economists.
Pat Choate, a Washington-based author and longtime advocate of a strong American manufacturing base, points out that manufacturing can be -- and often is -- both far more capital intensive and far more know-how intensive than the advanced services such as software and financial engineering on which the United States has staked its future. "The Germans, like the Japanese, have a structural advantage," Choate says. "They have concerned themselves with the structure of their economy, while we have been indifferent. It would be unthinkable for the German government to facilitate the outsourcing of industry as the Clinton and Bush administrations did."
Choate adds that German manufacturers enjoy a key advantage in research and development thanks to close links with universities. "The German system of research institutes goes back to the Kaiser Wilhelm institutes of the 19th century and continues today," he says. "Germany is a major source of basic research and then practical development. We got a boost before and after World War II when so many of their scientists came here, but we have failed to link our research universities with industry as ... the Germans [have]."
Meanwhile, on examination, many of Germany's economic failings turn out to be strengths in disguise. Take, for instance, the almost complete absence of credit cards. This is generally taken by American observers to be merely a reflection of an antiquated German economic culture. But Luigi Guiso, a Florence-based expert on economic culture, points out that there is probably more to it than this. As a matter of policy, the German banking system has hindered the rise of credit cards and has instead promoted debit cards. Credit cards reduce the savings rate whereas debit cards boost it, providing German banks an abundant source of funding to support their corporate clients.
All this makes more sense when you realize that in many areas of advanced manufacturing, the global economic cycle is particularly severe. Thus, even the most capably managed companies sometimes need considerable financial support to ride out downturns. This is where Germany's continuing high savings rate comes into its own. The savings are disproportionately channeled -- via Germany's bank-dominated system of patient capital -- into supporting advanced manufacturers. These then typically come back stronger than ever in the next up-cycle. By contrast, their competitors in nations like the United States and Britain have too often had to fend for themselves. Over the last half century, each succeeding recession has left American and British manufacturers more financially exposed. As a result, Germans have consistently increased their market share in advanced manufacturing. There is a long list of specialty items in which even remarkably small German makers now dominate world markets. Examples run the gamut. Windmoeller & Hoelscher, for instance, enjoys a 90 percent share of the world market for machines that make heavy-duty paper bags. Achenbach Buschhütten has a similar share of the world market for aluminum-rolling mills. Herbert Kannegiesser dominates the world market for hotel laundry equipment.
Although most economists of the Anglo-American tradition regard Germany's job-protection arrangements as a major competitive disadvantage, these represent yet another way in which the German model is focused on the economy as a whole. From the point of view of a shareholder interested merely in short-term profits, it may be inconvenient that a corporation cannot readily lay off workers in a downturn, but for the whole economy, the result is clearly to dampen the negative effects of the economic cycle.
More important, because workers enjoy considerable job security, it is much easier for management to introduce new, more efficient production technologies. Workers tend to embrace new technologies as the best way to ensure their job's long-term viability. Moreover, the infrequent worker turnover at German companies is a key reason why German employers are willing to invest heavily in employee training. As Herrigel points out, there is far less risk than in the United States that workers will take their skills to a rival employer. "Germany has constructed a whole system to prevent poaching by rival employers," he says. "There is no such thing as free riding, whereby an employer can poach away workers by offering them a few pennies more per hour. The whole German economy depends on skilled labor, and there is a robust program of vocational training in which every employer participates."
Even the co-determination system works well. Although in theory workers might be tempted to use their boardroom power to award themselves unrealistically large wage hikes, in practice this rarely happens. Instead, workers take a moderate approach in the interests of their employer's long-term health. The result is that German corporate executives generally regard co-determination as an aid and not a hindrance as it helps ensure worker flexibility when work procedures need to be changed or tasks reassigned.
One of the more consequential effects of co-determination is on corporations' outsourcing policies. Where the most sophisticated production technologies are concerned, workers have a strong interest in preventing technology transfers abroad, which are rightly seen as undermining the viability of jobs at home. In opposing such transfers, workers are acting precisely in the national interest. By contrast, the American model, in which companies like IBM, Boeing, and Hewlett-Packard readily transfer even many of their most advanced production technologies to foreign subsidiaries, clearly hastens the demise of American economic leadership.
German labor tends to respond resourcefully in the face of outsourcing threats. Herrigel cites the example of one engineering company he studied, which cancelled an outsourcing plan after consultation with workers. "This was a company that made huge ball bearings for the shipbuilding industry, and the task of polishing and assembling the bearings was considered too labor intensive for German workers," he recalls. "As a result of works-level consultation, however, the trade union suggested new, more efficient work procedures that made it preferable to retain the entire production in Germany."
Perhaps the ultimate proof that all this adds up to an extraordinary engine of economic success is in Germany's export performance. In 2008, for instance, German exports reached fully $1.49 trillion, which comfortably topped America's $1.27 trillion. Put another way, on a per-capita basis Germany out-exported the United States by more than 4 to 1 ($18,200 per capita versus $4,160). Wolfgang Lutterbach of the German Confederation of Trade Unions puts it succinctly: "How can we be champions in so many international markets and not be efficient?"
As of 2010 the Germans are evidently more efficient than ever. David Marsh, a London-based consultant and author of The Bundesbank: The Bank That Rules Europe, sums up the story: "After the reforms of the last decade -- but also after the setbacks of the credit crisis and ensuing recession -- the German model has emerged in better shape than before, to face the exigencies of global competition. About 90 percent of the German model -- crucially, the web of understandings between different sections of business, employees and government -- has survived intact."
Eamonn Fingleton is a Tokyo-based author whose most recent book is In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity (New York: St. Martin's Press, 2008).
(4) Eamonn Fingleton Reviews Pat Choate's Dangerous Business: The Risks of Globalization for America
Other writers have taken shots at globalism but few if any have come to the subject with a greater depth of experience or a more acute intellect than Pat Choate.
By Eamonn Fingleton
[This article first appeared in the September 15, 2009 issue of Manufacturing & Technology News.]
Americans of a certain age know that something is profoundly wrong. Their nation is not what it used to be. But what exactly has gone wrong?
In his new book Dangerous Business: The Risks of Globalization for America, author Pat Choate provides a deeply researched and authoritative answer: the fashion for radical globalism of the last two decades has driven American society off a cliff.
Other writers have taken shots at globalism but few if any have come to the subject with a greater depth of experience or a more acute intellect than Choate. Add in the fact that Choate is a born writer with powers of explication that other policy analysts can only dream of and the result is a remarkable tour de force that is must reading for any American concerned about his or her nation's future.
Choate, an economist and best-selling author who was Ross Perot's vice presidential running mate in 1996, comes up with devastating facts that give the lie to the globalist chop logic that in recent years has suffused the editorial pages of America's great newspapers.
As he points out, a fundamental issue is the extent to which Washington has come to be run by lobbyists -- and particularly lobbyists acting in various guises for foreign governments and industries. The activities of the K Street lobbying system have not only greatly speeded up the acceptance of globalism by America's largely economically illiterate elite but, in a pernicious self-feeding process, have been facilitated by such acceptance.
In showing how pervasive the lobbying system has become, Choate tells the story of Executive Order 13184, one of the last documents President Bill Clinton signed before he left office in January 2001. This order, which has so far gone almost entirely unpublicized, revoked a previous order Clinton had signed in 1993 which ostensibly debarred his officials from taking up lucrative lobbying opportunities when they left public service. The 1993 order had been widely hailed as a new, more ethical approach to government. Yet the effect of the 2001 order allowed, with a stroke, thousands of officials to head straight for K Street where they would sell their government-acquired contacts and knowhow to the highest bidder.
Perhaps even more tellingly, Clinton's 2001 order cleared the way for the incoming administration of George W. Bush to revert to K Street's idea of "business as usual." Had the 1993 order been allowed to stand, it could not have been revoked by any subsequent administration without setting off a major -- and probably unacceptably embarrassing -- political uproar.
The picture that emerges from Dangerous Business is of a Washington rancid with "legal" corruption -- a city where ambitious and ruthless young people routinely view public office merely as a stepping stone to a lucrative career on K Street. More and more, what matters to administration officials is not serving the American public but rather currying favor with future lobbying clients. In these days of radical globalism, that often means serving foreign corporations or governments whose interests are diametrically opposed to those of the United States.
Among countless other key points Choate makes, here are just a few.
The Clinton administration's push to establish the World Trade Organization has proved farcically counterproductive. Not only has the United States renounced the right to deal directly with other nations in resolving trade disputes, but by agreeing that the WTO should adjudicate such disputes Washington has lost all control. The United States has just one vote in the WTO -- the same as the island of Antigua, whose population is a mere 69,000 people! All WTO decisions moreover are made in secret by adjudicators who are completely unaccountable to any objective standards of fairness. Moreover most of the adjudicators come from Third World nations, many of which are notorious for exceptionally low standards of public ethics.
Where the story really gets Gilbertian is that the United States has been subjected to far more unfair trade suits than any other nation. Yet the American market is much more open than most others and America's trade deficits are by far the largest of any nation in world history. The basic problem is that the WTO is founded on the principle that American-style legal remedies are universally applicable around the world. In reality, they apply fully only in a few English-speaking countries. In other nations, most notably in China and other key nations in Confucian East Asia, the WTO's writ doesn't run, so there is usually no point in suing them for unfair trade practices. According to Robert Lighthizer, a former Deputy U.S. Trade Representative, WTO rules have been "gutting" American trade laws. As quoted by Choate, Lighthizer blames WTO judges for having "exceeded their mandate by inventing new legal obligations that were never agreed to by the United States ... allowing our trading partners to achieve through litigation what they could never achieve through negotiation."
The U.S. government can no longer even vouch for the safety of America's food supplies. True to its ultra-globalist principles, the Bush administration has thrown the American market wide open to food imports, many of which come from places like China and Mexico where hygiene and chemical use standards are a lot lower than in the United States. Meanwhile, in the name of reducing government spending, it has drastically cut the number of health inspectors who check on food imports. On Choate's numbers fewer than 1 percent of America's food imports were inspected in 2007, compared to 4 percent in 1999. The real comparison is with Japan, which inspects 15 percent of its food imports. Moreover Japan greatly strengthens it food security by implementing a system of approved suppliers, whereas, in deference to the laissez-faire principles of radical globalism, the American market is open to all-comers.
The advantage of the Japanese system is that it strongly pressures designated suppliers to police themselves. The pressure is intensified by the fact that Japanese regulators not only check imports but often subject designated suppliers' plants in China and elsewhere to surprise visits. Suppliers live under a Damocles sword in that if they fail an inspection they stand to lose forever their access to one of the world's most lucrative food markets. Under the American system, there is often virtually no downside for a remiss supplier in shipping sub-standard food into the United States.
The problems are compounded by the rise of a new delicacy which Choate labels "Trans-Pacific Chicken," his term for chicken produced in places like Mexico which, in frozen form, is shipped across the Pacific for processing in China only to be shipped back across the Pacific to the American market. As Choate points out, this modus operandi greatly increases America's vulnerability to the potentially devastating avian flu that has broken out in China in recent years.
Although the United States spends more on defense than all other nations combined, its approach to globalization has massively undermined its military security. Not only have American regulators permitted critical American defense suppliers to be taken over by foreign interests, not least corporations based in China, but the Defense Department makes no serious attempt to map America's potential vulnerability to shortages of components and materials that, because of the shutdown of the American manufacturing base, are now available only from foreign suppliers (typically based in East Asia). In the case of imported high-tech components, the risk moreover is massively compounded by the fact that "Trojan horse" viruses can be embedded in them that are impossible to detect but can be activated by a hostile supplier nation in a military confrontation. As Choate points out, such so-called cyber warfare was a key to the speed with which the United States knocked out Saddam Hussein's defenses in 2003. American suppliers in the 1980s had embedded Hussein's computers with viruses that were activated once the war started. Now the shoe is on the other foot, as East Asian nations, entirely overlooked by the American public, provide most of the highly miniaturized advanced components in American military hardware.
In his summing up, Choate provides a long list of things the United States must do to put its house in order. Perhaps the single most important is to improve the flow of information to the American public. Because American voters are being kept in the dark about key consequences of radical globalism, there is virtually no effective pressure on elected representatives to re-examine the nation's fundamental course.
Two decades ago the problem was merely that the establishment press was asleep at the switch. Today the problem is far worse: the press's upper reaches have become colonized by ambitious editors and commentators who realized long ago that the way to get ahead was to bow low to the gods of globalism. As Choate points out, part of the problem is that the rules about media concentration were greatly relaxed in 1996 and 2003. Thus these days most news reaching Americans is filtered by just a few giant transnational corporations -- corporations moreover that under the doctrines of globalism regard as their highest "ethical" obligation the need to maximize profits
If that were the only problem it would be bad enough but the fact is that most of these corporations are blatantly compromised as well. They have large commercial interests in China, for instance, so they don't encourage their editors to take too searching a look at America's dependence on China for everything from defense components to the funding of the national debt.
Even America's most prestigious newspapers, which for the most part are free of the blatant commercial pressures that have dumbed down American television reporting, are shadows of their former selves in the courage and openness with which they approach key issues. Ben H. Bagdikian, a prominent Berkeley journalism professor quoted by Choate, accuses American newspapers of self-censorship in their reporting of globalization. Bagdikian observes: "Trying to be a first-rate reporter on the average American newspaper is like trying to play Bach's 'St. Matthew's Passion' on a ukulele."
That may be so but -- at least for a while longer -- books will continue to be published that pull no punches. No book has done a better job of explaining the full dimensions of the problem than Dangerous Business.