Although Germany is one of the world's most powerful economies, there have been growing doubts within Germany about the state of its economy. The principal doubts have been about the ability of the German economy to modernize quickly enough to keep up in an increasingly competitive global environment. There is also a fundamental debate about the direction that the economy must take if it is to remain successful and prosperous. That debate includes a seminal discussion about Germany's place in the global division of labor, an issue of immense importance to an exporting nation such as Germany.

Those who have led the debate, and those who have insisted most firmly that Germany's economy must change, are those who have seen the world economy changing in directions that would increasingly relegate Germany to a second rank. They have seen the coming of a world in which the work performed by traditional German production sectors--whether coal, steel, chemicals, agriculture, electronics, or machinery--can be done better and more cheaply elsewhere. They believe firmly that Germany has to deemphasize some of those sectors and abandon others in order to move with the greatest speed and the most powerful possible commitment into new areas that will lead the growth of the world economy.

Five German institutes charged with analyzing economic issues have played a central role in the debate, issuing a series of reports and recommendations throughout the 1980s and 1990s in which they warned that the German economy had to change--and change quickly. They complained ever more insistently about what they described as the inadequate response of federal, Land , and local governments to the needs of the evolving global economy.

Those who opposed the arguments of the institutes fell into several categories. Some remained committed to traditional economic sectors, which they believed could still perform competitively, especially if enough effort was made to modernize and rationalize them or to find particular specialties. Others supported traditional sectors, not for economic but for social and political reasons. Still others believed that the issues had to be raised and understood but that action could and perhaps should be postponed.

The basic complaint about modernization has been that the German economy has not remained at the forefront of global development and progress and is not moving decisively into the ranks of the most advanced industrial societies, such as the United States, Japan, and the smaller Asian economies. The institutes have pointed out that new technologies--such as computer hardware and software--could not only improve traditional production but also could become new industries in themselves.

As part of their assertion that Germany was not modernizing quickly enough, the institutes have also expressed concern that the country has not given adequate priority to research and development and that German capital has not been venturesome enough. They have argued that funds have not gone sufficiently into the kinds of research or into the start-up ventures that have helped keep the United States at the forefront of international inventiveness even as that country's traditional industries have declined.

This does not mean that German industry does not invest in research and development. EU statistics have consistently shown that Germany has been either first or second in European research and development expenditures, with only France coming close enough to be a real competitor. But those same and related statistics also have shown that the German lead has been shrinking and that Germany does not have the lead in computer-oriented research and development. In particular, they have shown that Germany has not been doing well at the global level, lagging behind the United States and even further behind Japan in the pace at which it has been increasing its research expenditures. In advanced-technology areas, Germany has been trailing badly. The total German private and public research effort has consistently amounted to about 2.8 percent of GDP, but that is about the same percentage as the United States and Japan and is clearly not enough to allow the smaller German economy to keep up. A German patent office study showed that by 1989 West Germany had fallen behind in three of four major areas of domestic patent grants compared with Japan and the United States.

German technological progress has been uneven. The country has certainly remained competitive in biotechnology and general medical research. The same could be said about its competitive position in smaller robotic machine tools and in many areas of electronic and even specialized computer research. But this does not compensate fully for the lag in cellular communications, microtechnology, and computers.

The German government has been slow to assist firms in technological development. There has been strong German financial and scientific participation in a variety of European programs, such as Esprit, Eureka, Jessi, Race, or Brite--programs that are designed to internationalize research at the European level to enable the smaller European states to compete against the United States and Japan. These European efforts are significant, but their results as of the mid-1990s have not allayed the concerns of many Germans about falling behind.

The institutes have also addressed another problem, the German lag in establishing new ventures. This shortcoming goes to the core of the total functioning of the German system, including the conservatism of banking and financial practices. Germany has not found a way to create an environment in which small entrepreneurs in new fields arise in large numbers.

With unification as Germany's principal economic priority, the debate about structural reform has taken second place, and the government is giving it less priority than it received in the 1980s. But it remains an issue and will continue to be so as other parts of the world economy--including Eastern Europe--become more competitive.

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Source: U.S. Library of Congress