Globalisation
– Chances and Challenges for Germany
Lead in:
7 minutes
Find out where your personal belongings (clothes, shoes, bags…) were
produced (3 minutes). Mark the countries on a world map.
Introduction:
It is obvious that products from our daily lives come from all over the world. We are affected by
globalization as consumers, workers, citizens,…
First, we will have a closer look at the effects of globalization. Second, we will focus on the effects of
globalization in Germany.
Practice 1: Group work
The following tasks are for groups of 4 – 6 students. The students write their results (clearly arranged)
on transparencies (or on posters (DIN A3 format) – to be hung up in the classroom) and present their
results to the other groups.
Group 1: Text “Globalisation, Yes, Globalisation, No”
Task:
Describe positive aspects of globalization and find (more) examples which illustrate these aspects.
Group 2: Text “Two way street”
Task:
Read the text and illustrate it on a diagram.
Group 3: Cartoon “Globalization”
Task:
Describe and analyze the cartoon. Find arguments which support the message of the cartoon and
describe many different aspects of the cartoon’s topic.
Group 4: Cartoon “The free trade level playing field” and chart “Global trade 2007”
Task:
Describe the global flows of trade. Describe and analyze the cartoon.
Group 5: Cartoon “Globalization - wave”
Task:
Describe and analyze the cartoon. Find arguments and examples which support the message of the
cartoon.
You will find all the material needed below
practice: ca. 18 minutes
presentation: ca 20 minutes (4 minutes per group)
Practice 2: Group work
The following tasks are for groups of 4 – 6 students. The students write their results (clearly arranged)
on transparencies (or on posters (DIN A3 format) – to be hung up in the classroom) and present their
results to the other groups.
practice:
25 minutes
presentation: 20 minutes (4 minutes per group)
Text: Martin and István and the Globalization
Capital and labour are very mobile in our time of globalisation. Capital is moved to places where the
highest return (profit) is expected. Jobs go to places where the labour costs are lower. This report from
the famous German weekly paper Die Zeit describes an example for such a transfer of jobs.
Group 1: What interests and worries does the employee Martin have? Give some advice to Martin.
Group 2: What interests and worries does the employee István have? Give some advice to István.
Group 3: What interests and worries does the international corporation IBM have?
Group 4: What interests and worries does the politician, the mayor of the city of Schweinfurt, have?
Charts on Regional Competition
Group 5: Analyze the charts and find out reasons for the outsourcing / offshoring of jobs in Europe.
Describe potential future developments.
Advanced Practice 1: Outsourcing and Offshoring
Pair work: Text “Germany Rages at Nokia Plant Closure”
Task 1:
10 minutes
Task 2:
25 minutes
Presentations of the results of task 2: 10 minutes
Task 1: Outline the text. Find headings for the main paragraphs. Describe the Nokia case.
Task 2: Write a letter to the editor referring to one of the commentaries from various German
newspapers. (optional homework)
Advanced Practice 2:
perspective
The dilemma of globalization - A German
Pair work: Text “The dilemma of globalisation: A German perspective” by Hans Werner Sinn
Task: Outline the text. Find headings for the main paragraphs.
Practice 1: Group work
Group 1
Globalisation, Yes, Globalisation, No
By Sirajul Islam, 11 April, 2007
Globalisation was in discussion yesterday at a seminar at the World Bank Dhaka Office looking for
making it work for the developing world, viz. Bangladesh and other similar countries. Many foreign
and local experts including ministers, diplomats and economists explored the possibilities to get
more opportunities from globalisation, and identifying the constraints.
Globalisation is not all that bad either. There are some positive aspects of it. Some of them are:
- Foreign Direct Investment (FDI) has helped to reduce poverty by creating jobs and improving
incomes.
- The expansion of trade and foreign investment has accelerated social mobility and
strengthened the middle class.
- New communications and information technology have helped disseminate knowledge in
many fields of study and disciplines.
- Communication is cheaper and easier. Costs of telephone calls as well as travel have fallen.
This makes it easier to understand one another. Communities although heterogeneous, can
be more cooperative now that are more means of understanding each other.
- Globalisation makes it possible for humanity to have compassion for each other when
calamities, natural or man-made, affect others.
- Issues such as human rights and public accountability are brought to the fore.
- The rights of women are highlighted and the problems many women face are now
addressed.
…
http://www.countercurrents.org/gl-islam110407.htm
Task:
Describe positive aspects of globalization and find (more) examples which illustrate these
positive aspects.
Practice 1: Group work
Group 2
Minister: Globalization a "Two-Way Street"
Before a trip to India, Britain's e-government chief calls for public understanding of
globalization's benefits for both old and new economic powers
by Steve Ranger
Globalisation is a two-way street, with Indian companies creating jobs in the UK as well as UK
companies sending jobs overseas, according to e-government minister Pat McFadden.
This weekend McFadden is flying to India to visit Hyderabad and New Delhi, and meet with tech giant
TCS, industry body Nasscom and Indian tech ministers.
McFadden said the visit is about sharing the experience, in both the UK and India, of how technology
can be used to improve service delivery and make life easier for the public.
He said in a statement: "We have to get beyond the idea that globalisation is a one-way street where
jobs are simply transferred from developed economies to rising new economic powers like India
through outsourcing and offshoring.
"Globalisation is a two-way street, and there is now a growing number of Indian companies who are
investing and creating jobs here in the UK."
About 60 per cent of India's investment in Europe comes to the UK and more than 500 Indian
companies have operations in the UK in sectors such as IT, automotive components and
pharmaceuticals.
For example Indian IT services company TCS has 2,000 people in the UK, Infosys has about 1,400 staff
and HCL employs around 1,800.
McFadden added: "The countries best placed to prosper from globalisation are those who seek to
deepen trade, educational and cultural links. The potential for such partnerships between the UK and
India is enormous."
http://www.businessweek.com/globalbiz/content/apr2007/gb20070409_906113.htm
Task:
Read the text and illustrate it on a diagram.
Practice 1: Group work
Group 3
http://www.toonpool.com/cartoons/Globalization_9743
Task:
Describe and analyze the cartoon. Find arguments which support the message of the
cartoon and describe many different aspects of the cartoon’s topic.
Practice 1: Group work
Group 4
http://www.schnews.org.uk/images/506-free-trade.gif
Task:
Describe the global flows of trade. Describe and analyze the cartoon.
Practice 1: Group work
Group 5
http://www.toonpool.com/cartoons/Globalisation_30593
Task:
Describe and analyze the cartoon. Find arguments and examples which support the
message of the cartoon.
Practice 2: Group work
Capital and labour are very mobile in our time of globalisation. Capital is moved to places
where the highest return (profit) is expected. Jobs go to places where the labour costs are
lower. This report from the famous German weekly paper Die Zeit describes an example for
such a transfer of jobs.
Group 1:
What interests and worries does the employee Martin have? Give some advice to Martin.
Group 2:
What interests and worries does the employee István have? Give some advice to István.
Group 3:
What interests and worries does the international corporation IBM have?
Group 4:
What interests and worries does the politician, the mayor of the city of Schweinfurt, have?
Group 5:
Charts on Regional Competition – see below
Martin and István and the Globalisation
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They have never met: Martin, 44 years old, lives in a village near the city of Schweinfurt in Germany,
and István, 26 years old, lives in a village near the city of Székesfehérvár in Hungary. Probably, they
will never become acquainted. Still, there is a connection between the German and the Hungarian.
The computer company IBM has decided to move many hundreds of jobs from Germany to Eastern
Europe. István now has Martin’s job.
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Martin and Schweinfurt
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Not unusually Martin used to work forty-five hours a week and more. He needed nothing more than
his brain and his laptop. The World Wide Web connected him with his customers whose computer
programmes he serviced. He resembled a modern company: it did not matter whether he was in
Germany, Hungary or the Czech Republic, for, theoretically, he could have earned his money
anywhere. Only in his private life does he need a base. Companies move from country to country as
never before, and they seek the maximum in profit. But their employees have remained the same.
They seek the security of a home. Martin is married and has three children. Five years ago he and his
wife bought some property out in the country, borrowed some money and built a pretty house.
On September 30 he was sacked. The company paid him severance money, approximately a year’s
salary, which helps, of course, but the family will not get very far on it. Only in his mid-thirties did
Martin begin to earn good money, and up to now has put all of it into the house. In Schweinfurt IBM
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was the only large company for IT experts. Martin has applied for jobs in Munich, Nurnberg and
Stuttgart, up to now in vain. At 44, he counts as old in his field.
Sometimes, Martin says, it all seems crazy. IBM sent him to a dozen training and refresher courses,
sometimes a week at a time. Travel expenses, accommodations, course fees, the company paid for
everything. “They invested a lot of money in me, and now they are simply throwing it away”.
The city of Schweinfurt has 55,000 inhabitants, and on the city hall’s 430-year-old walls hang
paintings, and outside a fountain splashes musically while inside sits Gudrun Grieser, the Mayor. She
says this IBM business stinks to high heaven.
For fifteen years she has been a local politician, and for fifteen years she has been a member of the
CSU. Before that she was a teacher. She has threatened no one with mayhem, but she is nevertheless
hot under the collar. Gudrun Grieser says she understands companies who have no choice but to go
abroad, because they are about to go bust. “But IBM BS is very profitable, and when such a company
eliminates a job, that is just cynical”.
She also said this to Johannes Nagel. The head of IBM Germany sat at a table with the Mayor in
heavy chairs decked out in brown leather. Gudrun Grieser spoke about how university graduates
were involved here, highly qualified people, and how important these jobs were for Schweinfurt.
Johannes Nagel spoke about restructuring. Then they went their separate ways.
Gudrun Grieser said that a global company like IBM naturally was not dependent upon any one
country. “But when this happens all over the place, what will remain here in Germany”?
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István and Székesfehérvár
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In reality István has another name. Newly hired IBM employees in Hungary are not permitted to
speak with the press. At IBM István earns 100,000 Forint a month net, €400, and he says that is fine.
With shift-bonuses he sometimes gets 140,000 Forint, and in a few years he hopes to make 200,000
Forint (€800); after all, he is no beginner. Every day for three hours he sits in a bus and for eight
hours in front of a computer in an ergonomic chair in a large office, like Martin, but the desks in
Székesfehérvár are not so old as in Schweinfurt. On his computer screen flash messages from
companies in Spain, France and Germany experiencing software problems. István looks for mistakes,
morning, evenings, all night long, depending upon his shift schedule.
Afterwards he sometimes watches television at home. István is a quiet person who avoids the
limelight, just like Martin. It’s just that he is eighteen years younger and a few thousand euros
cheaper.
István’s village looks like villages in Germany. People live in detached houses, and each house has a
garden. At second glance the difference is apparent. The houses are old, the plaster facades are
weather-beaten, in the gardens tomatoes and cabbages, instead of flowers, flourish. Here and there
chickens scratch in the dirt and the odd pig roots about. Whoever lives off their own land makes do
with little money. This is how people make ends meet here.
István’s parents are happy that their son has a good job. They are both retired, and the mother,
formerly a secretary for Videoton, takes care of the vegetable patch, the father, formerly an engineer
for Videoton, feeds the chickens and also does repairs on the house they built thirty years ago. By his
own choice, István lives with them once again. A year ago after finishing the university, he had
started work for a company in Budapest. He made good money there, but he wanted to return to his
village, forty kilometres west of Székesfehérvár, where his parents and his girlfriend, a nurse, live. He
wanted to return to his roots.
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István did not ask why IBM suddenly needed new people in Székesfehérvár. Jobs today move around
from one country to another within weeks. But who wants to know where a job comes from? Who
cares who had it before? The main thing is that it exists, the main thing is that someone gets it. István
hopes that one fine day he will own his own house, together with his girlfriend, preferably in his
village, near his parents. Like Martin. “I will have to work a long time before I can afford it,” he says.
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IBM
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IBM boasts record profits, $8.5 billion last year alone, more than ever before. The German
headquarters for IBM, a subsidiary of the largest computer company in the world, is in Stuttgart. The
managers who are capable of providing answers to the questions posed for months by employees in
Schweinfurt and Hannover work here. Who forces a highly profitable enterprise like IBM to move
jobs? What in the business world can be relied upon when the profits made by a company are no
longer a guarantee of job security? IBM shows little interest in answering these questions.
On March 4 the company provided an explanation for the closing of its operations, which in part
read: “We are planning this step in order to take into consideration the changing needs of our
customers as efficiently and as economically as possible.” Until today no other statement has been
issued. The fact is that this spring Samuel Palmisano, the head of global IBM, announced in the
United States a first-quarter profit of $1.41 billion. Nevertheless, on the New York stock exchange the
value of IBM stock dropped sharply. Market analysts had expected a still bigger profit. Palmisano
announced “aggressive measures”. Soon thereafter it was affirmed that 8,000 jobs in western Europe
would be scratched.
The savings programme seems to be earning dividends. On July 19 IBM made known its new
quarterly numbers. They were unexpectedly positive. The stock prices went up. The company plans
on intensifying its reduction of jobs.
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Székesfehérvár once again
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Martin had been in Székesfehérvár once before, three years ago, for a week, where István now
works, in the IBM building in the Videoton industrial area. The company had just set up the branch
company. Martin came as an instructor whose job was to explain to the Hungarians how the various
computer programmes work. He was supposed to help raise the standard to the German level. It was
fun. The Hungarians and the Germans regarded each other as colleagues, and in the evenings they
drank beer together. Martin did not suspect that he was working to make his own job superfluous.
It is the morning after the late shift. István got home about midnight, he slept for a few hours, and
now he has a few hours until the bus takes him to work. He walks through the village with a friend.
The friend is also an information technician and he too works in the Videoton industrial area for an
American company. He is worried. A few Indians are visiting his department. They are learning the
ropes, and then they will be doing the work from India. Now he fears for his job.
István Nagy believes that his job is secure. And when bad quarterly figures in American once again
make aggressive measures necessary? “IBM has invested so much money in my education,” says
Nagy, “they would not simply throw me out”.
Source: Die Zeit, No. 31, 28.07.05
Practice 2: Group work
Group 5: Charts on Regional Competition
Analyze the following 5 charts and find out reasons for the outsourcing / offshoring of jobs in Europe.
Describe potential future developments.
Advanced Practice 1: Outsourcing and Offshoring
Pair work: Text “Germany Rages at Nokia Plant Closure”
Task 1: Outline the text. Find headings for the main paragraphs. Describe the Nokia case.
Task 2:
Write a letter to the editor referring to one of the commentaries from various German
newspapers.
Germany Rages at Nokia Plant Closure
Employees are outraged over the Finnish cell phone company's plans to close its Bochum
facility and move production to Romania
by David Gordon Smith
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A crying woman holds out a Nokia mobile phone, a protest banner in her other hand. The
image, which dominates the front cover of Thursday's Süddeutsche Zeitung and other
German newspapers, symbolizes the wave of grief and indignation sparked in the western
German city of Bochum by the news that Nokia is to close its plant in the city.
The Finnish cell phone manufacturer unexpectedly announced Tuesday that it would close
its plant in Bochum in the western state of North Rhine-Westphalia by the middle of the
year, with the loss of around 2,300 jobs. A further 2,000 jobs at the plant's suppliers are also
in danger. The company is moving production to a new plant in Cluj-Napoca, Romania,
where wage costs are a fraction of those in Germany, with other functions going to Hungary
and Finland. Hundreds of employees demonstrated outside the Bochum plant Wednesday in
protest against the closure.
As anger over the news continues in the city and beyond, the company is now being accused
of misusing state subsidies. The mass circulation newspaper Bild reported in its Thursday
edition that there is speculation that the Romanian government lured Nokia with the help of
subsidies from the European Regional Development Fund.
European Commission President José Manuel Barroso rejected the speculation, saying that
there had been no help from Brussels for the move to Romania. "If it is possible to move jobs
from Finland to Germany, then it must also be possible to move from Germany to Romania,"
he said. The German Deputy Economics Minister Hartmut Schauerte also told Reuters that
EU money had not been used to support the relocation. However a spokeswoman for Nokia
told Bild that the firm could have indirectly received subsidies in Romania in the form of
financial help for building roads to the factory, for example.
The economics minister of North Rhine-Westphalia, Christa Thoben, is checking to see if
Nokia will have to pay back €17 million ($25 million) in subsidies it received from the state.
Nokia had received a total of around €88 million in subsidies in Germany, from the federal
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government and North Rhine-Westphalia. According to Thoben, Nokia had assured her it
would guarantee 2,856 jobs in Bochum in the long term. However only 2,300 people are
working in the plant at the moment. Observers point out, however, that the deadline for the
job guarantee expired in September 2006.
Politicians from both sides of the political spectrum have condemned the decision, with
critics pointing out that the plant never operated at a loss. The governor of North RhineWestphalia, Jürgen Rüttgers, publicly embraced weeping protestors Wednesday and called
on the company to reverse its decision, accusing the Finnish firm of being a "subsidy locust."
The term "locust" is used in Germany as a negative shorthand for unwelcome profit-hungry
foreign investors such as hedge funds. Rüttgers, who belongs to Angela Merkel's center-right
Christian Democrats, is known for his populist protectionist take on globalization, having
famously coined the phrase "Kinder statt Inder" ("children instead of Indians") in 2000 to
argue for promoting education instead of immigration as a solution to the country's shortage
of computer specialists.
Kurt Beck, leader of the center-left Social Democratic Party, also accused Nokia's
management of exploiting the taxpayer. Hannelore Kraft, head of the SPD in North RhineWestphalia, said her party needed to "organize social resistance" against the move.
Despite the outspoken criticism, the company said Thursday it would not reconsider the
decision to close the plant.
Nokia is the latest in a series of cell phone manufacturers to move production from
Germany. One year ago, BenQ closed its German plant, while Motorola announced six
months ago it would leave Germany. The manufacturers are reacting to increasing
competition in the handset market which is putting pressure on prices and causing firms to
look to cut costs.
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Commentators writing in Germany's main newspapers Thursday all agree that mobile phone
manufacturing has no future in high-wage Germany and on the whole defend the company's
move.
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The conservative Die Welt writes:
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"It is unlikely that production at the Nokia plant in Bochum could have been maintained at
an acceptable cost. As early as 2006, the bankruptcy of BenQ demonstrated that Germany is
no longer really a suitable location for the production of mobile phones."
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"Playing the protectionist card and demanding more subsidies for German companies causes
more harm than good. In the end, it would cause more cases of companies going bankrupt
despite state support, and the required renewal of the economy would be hindered. The
result would be fewer jobs -- even if the downsizing would not be as dramatic as in the Nokia
case."
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The left-leaning Süddeutsche Zeitung writes:
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"People can and will examine whether Nokia has a legal obligation to repay its subsidies. But
it seems at first sight that they will not need to, assuming that the deadlines agreed (for
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guaranteeing jobs) had already passed. ... Nevertheless, Nokia would be well advised to
make a gesture of good will. The amount involved is €88 million, a relatively modest sum for
the global company, and something of much higher value is at stake, namely its good
reputation."
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The center-right Frankfurter Allgemeine Zeitung writes:
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"How should Nokia behave? A company, especially one whose board acts responsibly
toward its shareholders, must produce wherever costs are competitive and it makes
strategic sense. Before Nokia, its competitors BenQ and Motorola also had to unfortunately
choose to act to the detriment of their German plants. They will come back to Germany
when they feel it makes sense. Because even on days when there is such bad news, it must
not be overlooked that German companies are doing well against their international
competitors -- in the industrial machinery sector, for example, companies' products are
selling like hot cakes despite the strong euro. When in Germany enough ideas flow into a
product that it can only be manufactured here, then wage costs are not a big problem -- and
subsidies are unnecessary."
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In an editorial entitled "Why Nokia Is Doing the Right Thing," the Financial Times
Deutschland writes:
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"It is naked polemic to imply that the mobile phone manufacturers are misusing subsidies, as
Jürgen Rüttgers is doing. If he really wanted to help, he would invest more money in
education and research. Only that has a future in Germany. Nokia cannot be accused of
doing anything wrong. The management decided to act before problems arose or could no
longer be dealt with. This approach is clearly something which is hard to convey to the
German soul."
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The left-leaning Die Tageszeitung writes:
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"From the perspective of German politicians, the matter is simple: There are good subsidies
and there are bad subsidies. Good subsidies ensure that companies locate in Germany, even
though jobs are lost elsewhere. ... But if the EU's funding policies, which all member states
agreed on together, make Romania more attractive as a location with the help of, say, an
industrial park, the same politicians can become quite toxic. They then like to remind
everyone that Germany is the largest contributor to the EU budget, and thus indirectly pays
for the destruction of German jobs."
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"Should the EU therefore abandon its aim of bringing into line the standard of living in all
states? The consequence would be that the wages and working conditions in Romania would
remain miserable in the long term. That would be fatal for the whole of the EU -- not only
from a moral, but also from a social perspective. Because in a single market, companies
always prefer to go where the lowest wages are paid and the operating costs are especially
low."
Provided by Spiegel Online—Read the latest from Europe's largest newsmagazine
http://www.businessweek.com/globalbiz/content/jan2008/gb20080117_788133_page_2.htm
Advanced Practice 2:
The dilemma of globalisation: A German perspective
Pair work: “The dilemma of globalisation: A German perspective” by Hans Werner Sinn
Task:
Outline the text. Find headings for the main paragraphs
The dilemma of globalisation: A German perspective
By Hans-Werner Sin
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The five shocks
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Fear of globalisation has gripped the peoples of the West. The small Asian tigers have already caused
enough problems. Now that China and India have entered low-wage competition with products that
had previously been the domain of the industrialised countries things have become serious for
Europe and America. In America, a violent debate is raging about protectionism, and here in Europe
the voices are swelling of those who want to further fortify the “Fortress Europe”.
Especially Germany has become afraid, for the forces of globalisation now combine with other
exogenous shocks the country is now facing.
The euro has deprived Germany of the advantage of lower interest rates. The European common
market has helped the small European countries overcoming their disadvantage of being small, and it
has taken away the German comparative advantage of increasing returns to scale in production.
Today even Luxembourg has access to a large market.
EU Eastern enlargement has brought Germany low-wage competition at its own front door with
wages that average only 14% of west German wages.
German unification is costing the German state huge sums of money. Since unification, on balance
about 1025 billion euros of public funds have been transferred to East Germany until the end of
2004. This has forced the country to incur so much debt that it has been unable to fulfil the stability
and growth pact that it itself had imposed on the other European countries.
Combined with globalisation, this makes for five shocks at the same time. To be sure, somehow they
are good for the world, for Europe, and, let us assume, for Germany too. Nonetheless they are
shocks that at the least imply structural change and force people to face big challenges.
The shocks have contributed to a sharp reduction of German growth. … The problems which beset
Germany in this historic phase of development are reflected in particular in rising unemployment. In
Western Germany, unemployment has been growing, since 1970, along a strictly linear trend … .
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The bazaar economy
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Among the effects of globalisation, the relocation of labour-intensive parts of the production
process, either via foreign suppliers of intermediate products or via direct investment, is considered
especially alarming. Outsourcing and offshoring are the concepts we have learnt for this process.
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Back in the 1980s, big German industrial companies started to invest massively in Asia. …
Since the mid-1990s, the small and medium size German firms (SMEs) have also gradually been
leaving Germany. Some SMEs went to Asia, but Asia is far away and start-up costs are high. Most of
them are moving to Eastern Europe, for the Eastern European countries have overcome their
transformation crises, and most of them are already members of the EU or about to become
members. …The cultural proximity and the language skills of the East Europeans also facilitate
business. …
Germany is the country of the silent stars, the mid-size companies that are world leaders in their
market segments and are nonetheless widely unknown. Germany has about 450 such unknown
world market leaders. It is disquieting that the SMEs, the backbone of the German economy, are now
also relocating increasing parts of their production chain to Eastern Europe, for now the matter is
becoming serious.
Sometimes it is said that offshoring and outsourcing are safeguarding jobs at home. This may be true
in the sense that those who does not move production offshore or do not buy parts from low-wage
suppliers will go bankrupt if their competitors are relocating their production to low-wage countries.
In this trivial sense, relocation does retain jobs in Germany. …
…
In 2003, largely due to the appreciation of the euro, Germany was world champion in the export of
commodities, even ahead of the United States, and it was No.2 with regard to all exports, including
services. But the export boom is increasingly based on exporting products, only a small part of which
contain value added in Germany. The Audi, which is shipped from Ingolstadt to America, is largely
produced with parts made in Hungary, Slovakia and the Czech Republic, but its full value goes into
the German export statistics. It is similar with the Porsche Cayenne, which is exported from Leipzig.
88% of its value added was not produced in Leipzig at all. Rather, the almost finished car comes from
Bratislava. Only the gear box and the steering are added in Leipzig. Yet, the car enters the export
statistics with 100%. Such information explains why the marginal effect of exports on domestic value
added is only 45%. …
Germany is gradually developing into a bazaar economy which supplies the world with attractive
goods while producing an ever smaller share of their value added itself. The German companies that
are bearers of the brand names under which the final products are sold remain strong. But it is
doubtful to what extent German workers benefit from this. They risk being gradually rationalised out.
This is highly disquieting, and not only for them.
…
Workers who lose their jobs in firms that dislocate their production would be reemployed elsewhere,
in downstream production stages that remain in the country or in other sectors such as the service
and construction industries. The process would be efficient if workers were laid off in manufacturing
because they are urgently needed in the other sectors for activities that cannot be performed
abroad. … But that is not the way it works. Developments since the mid-1990s have not been
characterised by the emergence of new employment opportunities outside of manufacturing
industry that would offer an alternative to the unemployed. It is true that other sectors of the
economy have been creating new jobs, including of course the exporting firms, but their number was
by far not enough to absorb the people set free in the firms that were relocating parts of their
production abroad. …
What is going wrong here ?
In my opinion, the unambiguous cause is the lack of wage flexibility. Without flexible wages and
prices, which have the function of clearing the markets, there are no gains from trade.
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... To date, we are still defending our wages. There are the labour unions fighting wage reductions
tooth and nail, wage reductions that are the prerequisite for gains from trade. And there is the
welfare state also standing in the way of wage convergence. By providing wage replacement benefits
to the unemployed, it sets a wage floor below which market wages cannot fall. Especially social
assistance is the problem here, as its level is independent of labour productivity. This impairs the
necessary wage adjustment, at least for unskilled workers whose wages are close to the level of
social assistance. As a consequence, globalisation creates unemployment instead of gains from trade.
All of this is a true dilemma. We would best like gains from trade and full employment with out a
wage reduction. But that, unfortunately, is impossible.
If we prevent a reduction of wages, there will be no gains from trade. Instead, mass unemployment
will continue to rise.
…
The winners of globalisation
Who are the winners ? Unambiguously, the owners of companies and capital ! They profit from trade
and outsourcing to low-wage countries. Of course, they benefit from producing in Poland at a sixth of
west German labour costs while still being able to sell in the entire European internal market, if not
the world market. They also profit from continuing to produce here if wages come under pressure.
The workers are the losers. Those who offer labour, which the firms can acquire much cheaper
abroad, cannot belong to the winners of globalisation.
Unfortunately, very many people are affected by this development. Losers will, in particular, be the
less skilled industry workers, for whom the unions had extracted very high wage increases in the
past, making west Germany the country with the highest hourly labour costs in the world. As
competitors of Chinese and Polish workers, they bear the burden of wage adjustment. They have the
choice of defending their wages at rising unemployment or keeping their jobs at declining wages.
Only highly skilled employees, who are rather complements to the many people who are offering
their labour worldwide at very low wages, may belong to the winners like owners of companies and
capital. One cannot even be sure about them, however, as neither East Europeans nor the Chinese
are fools. In the end, all workers will face competition.
…
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Are there ways out ?
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This does not mean, however, that in this situation there is no need for policies as everything is for
naught anyway. Such a fatalistic view of things is unwarranted for the sole reason that there are in
fact ways to improve the past growth trend of our economy. At least the first dilemma can be
resolved, i.e. the conflict between high employment and income maintenance of the poorer strata of
society.
This conflict is mainly caused by an inefficiently constructed welfare state that uses wage
replacement to meet its redistribution goals. Wage replacement in the form of unemployment
compensation and social assistance is supposed to cushion the consequences of unemployment. It
itself creates unemployment, however, by establishing minimum wage demands (reservation wages)
that industry cannot meet in an increasing number of cases in view of foreign low-wage competition
from all over the world. By changing this wage replacement into wage subsidies, the redistribution
goals of the welfare state may be defended without having to raise taxes on capital. Wage
replacement turns the welfare state into a competitor of private business that pushes up wages and
destroys jobs there. Wage subsidies make the state into a partner. They do not establish minimum
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wage demands and create the very flexibility in wage setting that is required for reaping the
described gains from trade. At the same time, they prevent incomes from falling when wages
decline. …
To be sure, while it helps a lot, this system will not be able to cushion the income losses of the entire
working population. It provides support at the low end of income distribution, but is no solution to
the broad-based losses of wage earners at large. In the final analysis, such losses cannot be
prevented because capital is not available to finance ever escalating redistribution.
The only way I can see to reduce income losses of wage earners at large is saving. Those groups of
society of the Western welfare states that in the past have depended only on wage income must try,
by way of saving, to acquire that factor of production that is the winner of globalisation. The workers
in these countries need a second leg to stand on in order not to falter when the seas get rough.
Capital earnings must join wages as a second source of income. This argues for a policy of wealth
formation by workers and equity co-ownership in the firms.
In the 1970s, the German labour unions had posed the question of whether to put their collective
bargaining chips on co-determination or on co-ownership. As is well known, they chose the former.
This decision was, as is clear today, fundamentally wrong. If German employees had started 35 years
ago to accumulate true wealth, they would now belong to the winners of the historical process that
we call globalisation. It is not too late to make up for lost time. …
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Final remark
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This, ladies and gentlemen, is my view of things. I have no encouraging messages to offer on the
topic of globalisation, because even the good news that economists can contribute on gains from
trade is bad news for many people. The fundamental dilemmas of globalisation cannot be overcome
by wishful thinking. I nevertheless hope that you share my opinion that there is need for policy action
in order to react at least as well as possible to the challenges of these difficult times. I would be
happy if, by explaining the true state of the problems, I could have contributed to making the correct
policy responses a bit more probable.
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H.-W. S.
http://www.cairn.info/revue-economie-internationale-2004-4-page-111.htm