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Insufficient investment into future growth: the forgotten cause of low growth in Germany

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  • Karl Aiginger

Abstract

There is a consensus that within the European Union, Germany is presently the country lagging farthest behind in terms of economic dynamics. Most researchers blame rising wages, welfare costs, and overregulated labour markets for this poor position. Some add that as a result of membership in the European Monetary Union, Germany lost the advantage of having low interest rates. To a certain extent, all view German unification as a prime culprit. This article acknowledges that although these factors have contributed to the recent underperformance of Germany, another major reason has been overlooked. A problem was brewing in Germany long before unification, namely the danger of being a high wage country specialised in medium technologies. We show that Germany neither increased its investment into research and education, nor did it embrace ICT technology. Germany lost its position as the European leader in research expenditures relative to GDP. For a set of 16 growth drivers, the dynamics of investment into research, education and information technology during the nineties were the slowest of all EU countries, and according to a quantitative indicator of "total investment into the future" Germany ranked second to last. Investment into future growth is specifically crucial when costs are high and markets are strictly regulated. Comparing the three potential reasons for low growth, namely underinvestment into growth drivers, rising costs and strict regulation, we find the first one to be the most important growth blocker and the least acknowledged in the German debate.

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Paper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2003-14.

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Date of creation: Nov 2003
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Handle: RePEc:jku:econwp:2003_14

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Keywords: The German problem; unification; labour market reforms; high tech industries; structural reforms; Agenda 2010;

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  1. Giuseppe Nicoletti & Stefano Scarpetta, 2003. "Regulation, Productivity and Growth: OECD Evidence," OECD Economics Department Working Papers 347, OECD Publishing.
  2. Karl Aiginger, 2003. "A Three Tier Strategy for Successful European Countries in the Nineties," WIFO Working Papers 205, WIFO.
  3. Richard Layard, 2000. "Welfare-to-work and the New Deal," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 136(III), pages 277-287, September.
  4. Hans-Werner Sinn, 2003. "The Laggard of Europe (CESifo Forum Vol. 4, Special Issue No. 1)," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 4(SPECIALIS), pages 01-32, October.
  5. Giuseppe Nicoletti & Andrea Bassanini & Ekkehard Ernst & Sébastien Jean & Paulo Santiago & Paul Swaim, 2001. "Product and Labour Markets Interactions in OECD Countries," OECD Economics Department Working Papers 312, OECD Publishing.
  6. Karl Aiginger, 2003. "The Relative Importance of Labour Market Reforms to Economic Growth," WIFO Working Papers 208, WIFO.
  7. Hans-Werner Sinn, 2002. "Die rote Laterne Die Gründe für Deutschlands Wachstumsschwäche und die notwendigen Reformen," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 55(23), pages 3-32, December.
  8. Robert J. Gordon, 2004. "Two Centuries of Economic Growth: Europe Chasing the American Frontier," NBER Working Papers 10662, National Bureau of Economic Research, Inc.
  9. Freeman, Richard B., 1998. "War of the models: Which labour market institutions for the 21st century?1," Labour Economics, Elsevier, vol. 5(1), pages 1-24, March.
  10. Horst Siebert, 1997. "Labor Market Rigidities: At the Root of Unemployment in Europe," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 37-54, Summer.
  11. Karl Aiginger & Michael Landesmann, 2002. "Competitive Economic Performance: The European View," WIFO Working Papers 179, WIFO.
  12. Andrea Bassanini & Stefano Scarpetta & Philip Hemmings, 2001. "Economic Growth: The Role of Policies and Institutions: Panel Data. Evidence from OECD Countries," OECD Economics Department Working Papers 283, OECD Publishing.
  13. Eckhard Wurzel, 2001. "The Economic Integration of Germany's New Länder," OECD Economics Department Working Papers 307, OECD Publishing.
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