High-Wage Germany Competes Globally

Germany proves that a country can have high wages and still compete globally. The reason is competent management. Irish business expert David McWilliams provides the analysis. His insights apply also to why the USA suffers from economic malaise.

Or as the late W.E. Deming observed, systems drive productivity; management designs these systems. In other words, high wages are not the problem. Stupid, greedy, lazy management is.

It pays for Americans to step outside their media bubble for fresh insights into basic issues and basic choices for America. David McWilliams never fails to provide them.

David McWilliams, Dublin, Ireland, July 12, 2010

Last Tuesday morning, I drove off the Stena ‘Hollandia’ in the Hook of Holland en route to Germany and on to Croatia.

On either side of the road, houses were confidently decked out with sparkling orange flags as the Dutch nation prepared for the semi-finals that night.

They had every reason to be confident. By the time I arrived in Passau in Bavaria, the Netherlands were already one-nil up.

The journey from Holland leads you directly to the industrial heartland of Germany – theRuhrValley – and then onto the financial capital, Frankfurt, and towards the innovation hub – Bavaria.

When you drive through Germany you can actually see the economy.
By this I mean you can see the power of Germany in the constant flow of trucks transporting Germany’s exports out of the country.

This is the single biggest difference between driving across Britain from Holyhead to Harwich (which I did last Monday) and driving in Germany.

There is a different type of traffic in England. It is leisurely, mainly cars and coaches, and the motorways are relatively uncongested.

In Germany, the traffic is industrial, almost purposeful.
Trucks, if not quite outnumbering cars, are everywhere and you get the sense that this is a place that makes things, whereas in England there is precious little evidence of any industry on the roads.

This is an economy that doesn’t make much any more and what it does, isn’t transported in the back of lorries.

You can feel the German current account surplus on the A3 autobahn which takes you from north to south through the world’s second-biggest exporter, after China.
In the Ruhr, you are driving through an area that shouldn’t, according to most simple economic analysis, exist.

After all, how could German heavy industry compete at the high-cost level in Germany with the likes of China? But it does, and not only does it compete, it wipes the floor with its cheaper competitors.

Years ago, when I was studying the German economy, a German lecturer of mine told me that if you wanted to understand the German way of doing things you had to understand the primacy of the white blue-collar, male worker in policy-making.
She explained that keeping the industrial worker productive, in work and on a good wage was a legacy of the rise of Hitler.

The post-war government had to ensure that the source of fanatical politics – mass unemployment among young working-class men – was avoided at all costs. She argued that once you got this, lots of things in modern Germany fell into place.

Yet while this might explain policy from the top down, it doesn’t ensure success, and the fact that large parts of the Ruhr are still producing despite the high costs has to be thanks to brilliant management at the firm level.

To generate the sort of productivity required to keep factories open, there needs to be enormous investment in people, in upgrading skills and making sure that the systems are constantly evolving and adapting.

Contrast this with England, where concerns for the white working-class male revolve largely around policing, law and order, and the Burberry brand.
It is hard to explain how the country that at one stage invented almost everything could have let its industrial might wane so dramatically in one or two generations. But that is what has happened.

As a result England is dependent on foreign capital to pay its way.
Germany, on the other hand, generates so much surplus capital from its exports that it doesn’t know what to do with the money.