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  1. The Pathological Export Boom and the Bazaar Effect World Economy Annual Lecture Nottingham, 27 October Hans-Werner Sinn - CESifoMunich

  2. The German puzzle

  3. Million persons 5.0 4.5 4.0 3.5 East-G 3.0 2.5 2.0 1.5 Trend 1.0 0.5 0.0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 Unemployment in Germany1) 1970 – 2005 Germany West Germany 1) Since 1991 western Germany without Berlin, eastern Germany including Berlin. Source: Federal Labor Agency; 2005: calculations and forecast by the Ifo Institute, June 2005. Aug. 23, 2005

  4. 145 Ireland 105,5 % (growth 1995–2005) 140 135 130 125 120 115 110 105 100 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Real Gross Domestic Product in Selected EU Countries In 1995 prices, 1995=100 Finland 42.1% Spain 40.1% United Kingdom 33.0% France 25.3% Austria 24.8% EU15 24.0% Denmark 22.6% Italy 15.3% West Germany 14.0% (excl. Berlin) East Germany 6.9% (incl. Berlin) Sources: Eurostat, 2005: Forecast by the European Commission; West Germany and East Germany: Arbeitskreis Volkswirtschaftliche Gesamtrechnungen der Länder, April 2005; 2005: Forecast by the Ifo Institute (June 2005); Ifo Institute calculations. R Aug. 1, 2005

  5. Greece 18.6 Turkey 16.4 Spain 15.5 Ireland 14.5 Mexico 11.7 Australia 11.3 New Zealand 11.2 Czech Republic 9.8 Luxembourg 9.6 Austria 8.9 Iceland 8.7 Canada 7.8 USA 7.0 France 7.0 Italy 6.9 Portugal 6.5 United Kingdom 6.5 Euro area 6.4 Netherlands 5.3 Japan 4.4 Denmark 4.4 Sweden 4.3 Slovakia 4.0 Norway 3.7 Belgium 3.6 Finland 3.1 Germany 3.0 0 4 8 12 16 20 in % Net Investment Share in NDP - International Comparison (2003) Source: OECD, database National Accounts - Volume 2, 1970-2003; Ifo Institute calculations. Aug. 23, 2005

  6. But aren´t the Germans export champions?

  7. 1,138.3 United States 1,040.9 Germany Japan 659.3 China 652.3 France 559.4 United Kingdom 514.8 Netherlands 431.2 Italy 430.7 368.9 Canada Belgium 358.4 319.7 Hong Kong Korea 293.6 Spain 263.2 216.1 Singapore 206.8 Taiwan 0 200 400 600 800 1.000 1.200 Exports in 2004 World Merchandise Trade and World Trade in Commercial Services US dollar billion April 15, 2005 Source: WTO, Press Release: World Trade Report 2005.

  8. The German industry bazaar • Outsourcing & fall of Iron Curtain • The evidence on the bazaar effect • Gains from trade? • Rigid wages & welfare state • Pathological export boom • Conclusions & policy implications

  9. The German industry bazaar

  10. 450 silent stars

  11. 348,832 BAUMA + MINING, Munich 2004 320,969 ELMIA-WOOD, Jönköping 2001 312,539 CeBIT, Hannover 2004 192,164 EMO Hannover, Hannover 2001 190,993 Ambiente, Frankfurt/Main 2004 176,478 MACEF, Milan 2004 171,477 CONEXPO-Con/AGG, Las Vegas 2002 165,139 imm cologne, Cologne 2004 161,867 Automechanika, Frankfurt/Main 2004 161,332 drupa, Düsseldorf 2004 160,308 K, Düsseldorf 2004 155,938 INTERMAT, Paris 2003 155,252 IAA, Hannover 2004 154,877 Heimtextil, Frankfurt/Main 2004 153,627 ISH, Frankfurt/Main 2003 148,359 interpack, Düsseldorf 2002 143,416 HANNOVER MESSE, Hannover 2004 SALONE INTERNAZIONALE DEL MOBILE, Milan 142,277 2004 141,792 IAA, Frankfurt/Main 2003 138,345 ACHEMA, Frankfurt/Main 2003 0 50 100 150 200 250 300 350 400 Top-Twenty Trade Fairs Worldwide (2001 through 2004) Exhibition space inside (m2) Source: Ausstellungs- und Messeausschuss der Deutschen Wirtschaft e.V., Berlin 2005, on demand.

  12. 0 50 100 150 200 250 300 350 400 Top-Twenty Trade Fairs Worldwide (2001 through 2004) Exhibition space inside (m2) 348,832 BAUMA + MINING, Munich 2004 320,969 ELMIA-WOOD, Jönköping 2001 312,539 CeBIT, Hannover 2004 192,164 EMO Hannover, Hannover 2001 190,993 Ambiente, Frankfurt/Main 2004 176,478 MACEF, Milan 2004 171,477 CONEXPO-Con/AGG, Las Vegas 2002 165,139 imm cologne, Cologne 2004 161,867 Automechanika, Frankfurt/Main 2004 161,332 drupa, Düsseldorf 2004 160,308 K, Düsseldorf 2004 155,938 INTERMAT, Paris 2003 155,252 IAA, Hannover 2004 154,877 Heimtextil, Frankfurt/Main 2004 153,627 ISH, Frankfurt/Main 2003 148,359 interpack, Düsseldorf 2002 143,416 HANNOVER MESSE, Hannover 2004 SALONE INTERNAZIONALE DEL MOBILE, Milan 142,277 2004 141,792 IAA, Frankfurt/Main 2003 138,345 ACHEMA, Frankfurt/Main 2003 Source: Ausstellungs- und Messeausschuss der Deutschen Wirtschaft e.V., Berlin 2005, on demand.

  13. The fall of the Iron Curtain: Outsourcing and offshoring

  14. The bazaar effect Outsourcing of upstream production Hollow shell? The example of the Porsche Cayenne

  15. 60 % of SME’s engaged outside old EU German direct investment in eastern Europe higher than ever Nearly 4 million jobs abroad, 800,000 in eastern Euope Competitiveness of firms vs. that of employees

  16. German workers lose their monopoly position in delivering to the bazaar

  17. Denmark 28.14 West Germany 27.60 Norway 27.31 Switzerland 25.31 Sweden 23.32 Austria 21.50 France 20.74 USA 19.91 United Kingdom 19.89 Ireland 18.79 Japan 17.95 Italy 17.24 Spain 16.59 Korea 10.00 Portugal 7.21 Hungary 4.53 Czech Republic 4.49 Estonia 3.88 Slovakia 3.61 Poland 3.29 Lithuania 3.03 Latvia 2.52 Romania 1.78 Bulgaria 1.45 China 1.10 0 5 10 15 20 25 30 Labour Costs1) per Hour in 2004 Euros 1) Average labour costs in industry. Aug. 23, 2005

  18. Where is the evidence?

  19. The decline in production depth

  20. % % 42 42 West Germany 40 40 38 38 36 36 34 34 32 32 30 30 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 The Declining Production Depth in Manufacturing Share of own value-added in manufacturing output (1970 – 2004) Germany Sources: German Statistical Office, Special series 18, Series S.21 (West Germany; old National Accounts data), Series S.26 (Germany: National Accounts Revision, May 2005); calculations by the Ifo Institute. Aug. 23, 2005

  21. % % West Germany Germany 52 52 48 48 Machinery 44 44 40 40 36 36 Chemical industry 32 32 28 28 24 24 Food, beverages and tobacco 20 20 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 The Declining Production Depth: Various Industries Share of own value-added in manufacturing output (1970 – 2004) Electrical industry Basic metals, fabricated metal products Motor vehicles Sources: German Statistical Office, Special series 18, Series S.21 and Series 1.3, Ifo Institut calculations. Aug. 23, 2005

  22. % % 34 34 32 32 West Germany 30 30 28 28 26 26 24 24 22 22 20 20 18 18 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 Share of Manufacturing Value Added in GDP 1970-2004 Germany Sources: German Statistical Office, Special series 18, Series S.21 (West Germany; old National Accounts data), Series S.26 (Germany: National Accounts Revision, May 2005); calculations by the Ifo Institute. Aug. 23, 2005

  23. Outsourcing to the service sector?

  24. Components of the change in German manufacturing production (manufacturing industry) 1991 to 2004, 1995=100 170 160 Imported intermediaries (real) 150 140 Domestic intermediaries (real) 130 120 Real output 110 100 Real value added 90 80 1992 1994 1996 1998 2000 2002 2004 Bazaar-Economy Sources: Federal Statistical Office; Ifo Institute calculations. Aug. 23, 2005

  25. Domestic intermediaries (real) 33.5 % 16.7 % Manufacturing value added (real) 49.8 % Imported Intermediaries (real) Components of Change in Manufacturing Output 1995 – 2004 3.0 % 29.3 % Aug. 23, 2005

  26. 310 2002 280 2000 250 220 190 Line of origin 160 1995 130 1991 100 350 400 450 500 550 600 650 700 750 800 Sources: German Statistical Office, National Accounts, Input-Output Tables, Importabhängigkeit der deutschen Exporte and Sprcial series 18, Series S.26, Ifo Institute calculations. Exports and Imported Intermediaries1) Euro billions V = imported intermediaries1) V = -100.2 + 0.53*X Elasticity of imports with regard to exports = 1.36% Elasticity of exports with regard to value added = 1.3% X = exports1) 1) Both variables are deflated by the export price index. Aug. 23, 2005

  27. Is Germany affected more strongly, and if so, why?

  28. 40 38 36 34 32 30 1991 1993 1995 1997 1999 2001 2003 Bazaar Effect in International Comparison Share of own value-added in manufacturing output % Germany 4.0 3.0 EU except Germany1) 1) Austria, Belgium, Denmark, Finland, France, Italy, Netherlands, Portugal, Sweden, Spain, United Kingdom. Sources: German Statistical Office, Special series 18, Series S.26, OECD, STAN database for Industrial Analysis, Deutsche Bundesbank, Ifo Institut calculations. Aug. 23, 2005

  29. 40 38 36 34 32 30 1991 1993 1995 1997 1999 2001 2003 Bazaar Effect in International Comparison Share of own value-added in manufacturing output % Germany USA, Japan, France, United Kingdom Sources: German Statistical Office, Special series 18, Series S.26, OECD, STAN database for Industrial Analysis, Deutsche Bundesbank, Ifo Institut calculations. Aug. 23, 2005

  30. Countries Jahr Share (%) Italy 1995 17 2000 19 Denmark 1995 22 2000 26 Finland 1995 20 2000 24 Netherlands 1995 29 2000 30 Austria 1995 25 2000 29 Sweden 1995 23 2000 28 Germany 1995 20 2000 26 Share of Foreign Intermediaries in Total Intermediaries +2 +4 +4 +1 +4 +5 +6 Legend: All numbers refer to total economy. Those countries are mentioned for which Eurostat data are available. Change of share in percentage points. Sources: Eurostat, Ifo Institut calculations. Aug. 25, 2005

  31. 12.0 6.7 5.2 0.9 -3.9 -4.4 -4.7 -5.9 -8.2 -10.6 -11.1 -12.3 -14.4 -14.9 -16.2 -18.5 -18.6 -18.6 -22.2 -24.0 -26.9 -30 -25 -20 -15 -10 -5 0 5 10 15 Employment in Manufacturing Change 1991 to 2003 in % Canada Spain New Zealand 2) Australia 1) Norway Finland USA 1) Italy Luxembourg Portugal Netherlands France 2) Sweden Denmark Austria Korea United Kingdom 2) Belgium West Germany 3) Japan 2) Germany 1) Australia, USA: 1991–2001. 2) New Zealand, France, United Kingdom, Japan: 1991–2002. 3) West Germany incl. Berlin. Source: OECD STAN, database for Industrial Analysis, 2005. Aug. 26, 2005

  32. Million persons 11.0 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 Employment in Manufacturing West Germany Germany including Berlin Sources: German Statistical Office, Special series 18, Series S.21 and S.26; Arbeitskreis VGR der Länder, Volkswirtschaftliche Gesamtrechnungen, Länderergebnisse, Series 1, Part 1, February 2005. Aug. 24, 2005

  33. The causes High wages Geographical proximity Cultural proximity

  34. English German French 100 90 80 70 60 50 40 30 20 10 0 Secondary School Pupils1) learning English, German and French in 2003 Latvia Poland Croatia Estonia Lituania Bulgaria Slovakia Hungary Romania Slovenien Czech Republic 1) Pupils in the upper and lower levels corresponding to levels 2 and 3 of the International Standard Classification of Education (ISCED) in % of all pupils at this level. Source: Eurostat. Aug. 23, 2005

  35. Gains from trade?

  36. % 25 20 15 10 5 0 1991 1995 2000 2002 Share of Export Induced Domestic Value Added1) in German Gross Domestic Product A meaningless indicator 1) Gross value added directly created in the production of exports and upstream domestic production stages. Source: German Statistical Office, Importabhängigkeit der deutschen Exporte, Wiesbaden 2004. Aug. 26, 2005

  37. Index (2000=100) 110 110 100 100 90 90 80 80 70 70 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 International Terms of Trade1) 1) Ratio of price indices of exports to price indices of imports. 1950 to 1990 West Germany, from 1991 Germany. Sources: German Statistical Office, (1991–2004) Special series 18, Series S.26, Table 2.3.3; (1970–1991) Series S.21, Table 3.3.1; (1950–1970) Lange Reihen der Wirtschaftsentwicklung 1998, Wiesbaden 1999, Table 15.3. Aug. 24, 2005

  38. Labour Volume1995 – 2004, Full-time Equivalents - 1.09 mill. 1.26 mill. - 0.17 mill. Manufacturing industry Non-Employment Employment in the rest of the economy Aug. 24, 2005

  39. Why wages are rigid

  40. Social assistance as job killer of low-skill workers The Harmonica Effect Social assistance

  41. 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1980-84 1985-89 1990-94 1995-99 2000-01 Earnings Disperson1) in USA, United Kingdom and Germany1980 – 2001 USA United Kingdom Germany 1) 9 / 1 decile ratios for the gross earnings of full-time employees. Source: OECD, Employment Outlook 2004, table 3.2, p. 141.

  42. The pathological export boom

  43. High wages kill labour intensive industries

  44. Brecher (QJE 1974) Davis (AER 1998)

  45. The bazaar effect and the pathological export boom combined

  46. Effects of a High-Wage Policy Import competing sectors Export sectors (capital intensive) (labour intensive) Upstream (labour intensive) Downstream (capital intensive) Normal specialisation effect Aug. 24, 2005

  47. Effects of a High-Wage Policy Import competing sectors Export sectors (capital intensive) (labour intensive) Bazaar effect Upstream (labour intensive) Downstream (capital intensive) Normal specialisation effect Aug. 24, 2005

  48. Effects of a High-Wage Policy Import competing sectors Export sectors (capital intensive) (labour intensive) Bazaar effect Upstream (labour intensive) Downstream (capital intensive) Normal specialisation effect Aug. 24, 2005

  49. Samuelson´s argument Biased technological progress Countries become more similar Trade collapses

  50. Conclusion • Strongest bazaar effect in Germany • German workers lose their monopoly position • No gains from trade with German welfare • Pathological boom of value added in exports • Pathological exaggeration of bazaar effect