Globalization and its Challenges for Germany, Europe, and the IMF
IMF News, January 10, 1997
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- Published: January 10, 1997
Overview
- Address by Michel Camdessus, Managing Director of the International Monetary Fund, at a conference sponsored by the Christian Social Union, Münich, Germany, January 10, 1997.
- Central thesis: Globalization extends prior trends of openness and integration, creating unprecedented opportunities and risks for Germany, Europe, and the IMF; outcomes depend on policy responses.
Opportunities of Globalization
- Continuation of growing openness and integration that produced half a century of prosperity.
- Capital mobility and expanding international financial markets broaden investment opportunities and portfolio diversification for investors.
- Trade expansion increases consumer choice and access to low-cost goods.
- Example statistic: During 1990 to 1995, German exports to developing countries increased by close to 10 percent per year on average in U.S. dollar terms, while German exports to industrial countries increased by only 3 percent annually over the same period.
- By 1995, exports to developing countries represented 25 percent of total German exports, compared to just 19 percent at the beginning of the decade.
- Global capital flows to developing markets helped sustain demand for industrial country exports and during 1990-93 helped cushion the impact of downturns in industrial countries.
Main Risks Associated with Globalization
- Financial instability: recent decades saw plunging asset prices, exchange market volatility, crises sparked by Mexico, and collapse of major financial institutions in industrial and emerging markets.
- Marginalization: countries unable to participate in trade or attract private investment risk being left behind; poorest countries at greatest risk.
- Cultural concerns: potential for increasing cultural homogeneity and stress on national and regional cultures.
What Globalization Means for Germany
- Germany’s historical strengths: stable currency, social market economy, commitment to European integration.
- Challenges identified:
- Structural rigidities, especially in the labor market, impede adjustment to sectoral shifts associated with globalization.
- Hourly labor costs in German manufacturing are about 50 percent above the average found in other G-7 countries.
- Rise in trade-weighted relative unit labor costs since 1989 has eroded manufacturing competitiveness and pressured domestic profits and employment.
- Centralized bargaining, generous social transfers funded by high payroll taxes, and compressed wage differentials have discouraged flexibility.
- Real wages of low-skilled workers have risen faster in Germany than in other industrial countries.
- Social security contributions equivalent to more than 40 percent of gross wages; steeply progressive marginal income tax rates create a high tax wedge.
- Long duration of unemployment compensation and high replacement rates discourage job seeking and contributed to rapid east-west wage convergence and high unemployment in the east.
- Resulting structural unemployment increased fiscal burden, necessitating higher tax rates and discouraging investment and job creation.
Policy Recommendations for Germany (enumerated)
- Make wage determination and work rules more flexible:
- Ease dismissal rules, promote part-time jobs, extend fixed-term contracts.
- Increase realism in wage negotiations and introduce flexibility into centralized collective bargaining so wage levels better reflect productivity and skill differences.
- Reduce employers' non-wage costs and disincentives for the unemployed to seek jobs:
- Broaden the tax base, flatten the steep marginal tax schedule, and lower the statutory corporate tax rate.
- Reform social security to limit further increases in contribution needs as the population ages.
- Expect contributions from the Waigel Commission on tax reform and the Blüm Commission on pension reform.
- Further deregulation:
- Increase competition across borders and between Länder in electricity, natural gas, trucking and telecommunications to reduce input costs.
- Deregulate financial sector to remove tax disincentives and cumbersome procedures impeding Finanzplatz Deutschland; measures already include introduction of short-term government paper and lowering reserve requirements, but more is needed.
- Social protection and adjustment:
- Easing adjustment costs for affected sectors and people should focus on promoting adjustment and jobs rather than protecting existing employment at the expense of the unemployed.
- Cites the Netherlands example: increased labor market flexibility reduced unemployment while maintaining social preferences.
Implications for Europe
- Parallels with Germany: need for macroeconomic and monetary stability plus structural reforms.
- Timely and full completion of the Maastricht process is a "must" for Europe.
- Support for the stability and growth pact as striking a reasonable balance between penalizing lax policies and providing flexibility for unexpected developments.
- Suggestion: ECOFIN undertake effort to agree on rules for fiscal transparency and rectitude to strengthen mutual trust and conform with the Declaration adopted by the Interim Committee of the IMF.
- Structural reforms needed across the EU:
- Restructure social security to face demographic change and concentrate benefits on the truly needy.
- Create more flexible labor markets to adjust to global changes, raise potential output growth, and avoid pockets of high unemployment once monetary union limits exchange rate adjustments.
- Potential gains if EU remains open and adaptable:
- A deeper, more efficient financial system comparable to the United States.
- Greater opportunities for growth, a larger international role for the euro, and greater influence in world affairs.
- The euro’s potential as a key currency will depend on supportive fiscal and structural policies.
The IMF and the International Community’s Response
- IMF role: provide policy advice, financial support, surveillance, and standards for data dissemination.
- Membership and program scope:
- Membership expanded to 181 countries.
- IMF supports through financing adjustment and reform programs in about 60 countries.
- Surveillance enhancements:
- More continuous and probing dialogue with authorities.
- Greater attention to banking system soundness, sustainability of financial flows, countries at risk of adverse market reactions, and potential spillovers.
- Developing standards to guide dissemination of economic and financial data.
- Financial resources and mechanisms:
- Work underway on the Eleventh General Review of Quotas; quotas are the main resource base for IMF lending and a substantial increase is the top priority.
- G-10 countries, including Germany, and other strong-balance countries are establishing parallel financing arrangements so the IMF could access emergency resources of up to approximately US$50 billion in the event of a systemic crisis.
- Support for the Enhanced Structural Adjustment Facility (ESAF) to ensure sufficient resources until it becomes self-sustaining early in the next century.
- ESAF will be the vehicle for the IMF/World Bank initiative to relieve the debt burdens of heavily indebted poor countries.
- Recognition that bilateral concessional support will remain necessary for poorest countries, especially in Africa, alongside fuller access to world markets for goods where these countries have comparative advantage: agricultural and mineral products and basic manufactures.
Cultural Considerations
- Camdessus’s personal view: confident that European cultural heritage is not threatened by global "supermarket cultural products."
- Emphasis on the role of European leaders at national, regional and local levels to keep cultural heritage alive and vibrant.
- Advocacy for a dialogue of cultures as a condition for civilizational renewal.
Conclusion
- Globalization is an inescapable trend affecting all countries; whether it becomes a threat or an opportunity depends on policy responses.
- With appropriate policies—macroeconomic stability, structural reform, flexible labor markets, fiscal transparency, and international solidarity—Germany and European partners can preserve past achievements and build a stronger future.
- Hope that Europe will help make globalization the success story of the twenty-first century.
Address by Michel Camdessus, Managing Director of the International Monetary Fund, Münich, Germany, January 10, 1997.