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The German Model in the 1990s: Problems and prospects

Steven Casper; Sigurt Vitols Online Publication Date: 01 June 1997 To cite this Article: Casper, Steven and Vitols, Sigurt (1997) 'The German Model in the 1990s: Problems and prospects', Industry & Innovation, 4:1, 1 - 13 To link to this article: DOI: 10.1080/13662719700000001 URL: http://dx.doi.org/10.1080/13662719700000001

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Industry and hrnovation, Volume 4, Number I , June 1997

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THEGERMAN MODEL IN THE

STEVEN CASPER AND SIGURT VITOLS

1990s:

PROBLEMS AND PROSPECTS

n the 1970s and 1980s West Germany received widespread attention in other industrialised countries as an attractive national model of adjustment to slower worldwide growth, greater competition from developing countries, and increasing costs of energy and raw materials. The term Model1 Deutschland, which was originally coined by the German Social Democratic Party in their reelection campaign in 1976, came to symbolise adaptation to these new conditions through a strategy of export-oriented industrial modernisation (Markovits 1982). The success of this strategy can be seen most clearly in Germany's export performance; between 1970 and 1990, exports as a percentage of GDP increased from 21 to 32 percent, and the balance of trade was negative in only one year (1980) and increased from an annual average of 2.4 percent in the 1970s to 3.2 percent in the 1980s. In addition, Germany had good labour market performance; when using the standardised OECD figures, unemployment was lower than in western Europe and the US and the sharp trend toward wage and income inequality in most other industrialised countries was largely avoided (OECD 1993; 1994).' At the heart of this 'German model' of adjustment was the upgrading of a broad spectrum of industrial sectors in order to concentrate production on higherquality, specialised goods targeted toward premium domestic and world markets. This strategy, which has been variously named diversified quality production (Sorge and Streeck 1988), new production concepts (Kern and Schumann 1986) and flexible specialisation (Piore and Sabel 1984), is based on a combination of building on traditional strengths - such as the technical ability and flexibility of skilled manual workers - and the latest innovations. This capacity, which was visible as early as the end of the last century when Germany became Europe's industrial leader and was never eradicated by the relatively weak adoption of mass production methods in industry after World War I1 (Chandler 1990; Herrigel 1995), was strengthened after the first oil shock of 1973-4 through combining an upgrading of the 'neo-craftsman' with the rapid diffusion of a number of innovations, most notably the microchip (Katzenstein 1989b). In his landmark study of the industrial profiles of ten countries, Porter (1990) notes

1 The performance of Germany thus constrasted markedly with the growing balance of trade problems of other industrialized countries such as the US and the UK and the massive unemployment problems of other western

European countries. The divergence between this stellar export performance and less impressive GDP and productivity growth may be explained by the absence of an indicator taking into account quality, especially i~nportantfor a country which has focused on the higher end of the market (Carlin and.Soskice 1997). 136&2716/97/010001-13 O 1997 Journals Oxford Ltd

the exceptional broadness of the 'competitive advantage' of Germany across a wide range of sectors. The most visible sector among these 'success stories' is the automobile industry, which for millions of consumers worldwide has come to symbolise the craftsmanship and performance embodied in goods 'made in Germany.' The great expansion of production of the traditionally low-volume luxury producers Mercedes-Benz and BMW to increase sales at the high end of the market is a significant story in and of itself. However, German industry's capacity to change has been most clearly demonstrated in the dramatic transformation of Volkswagen, which had been established expressly to mass-produce a low-cost car accessible to every household ('the Beetle'). After the first oil shock, Volkswagen radically changed its product market strategy by terminating production of the Beetle in Germany, introducing a range of new models aimed at significantly higher market segments and purchasing the niche producer Audi (Streeck 1984; 1989). This example was repeated again and again, not only in sectors familiar in the literature in English such as industrial machinery (Herrigel 1990; 1995) and chemicals (Allen 1989) but also in sectors such as steel (Biinning et al. 1993), food processing, textiles and wooden furniture (Pries, Schmidt, and Trinczek 1989). While the 'weighting' of the importance of different factors differ somewhat, most analyses view the contributions of business, labour, and the state as crucial for the success of the German model. Business has shown a high capacity to coordinate and cooperate through a dense network of industry associations, local chambers of commerce and industry, and extensive interlocking directorates and shareholdings between banks and nonfinancial companies. This coordination capacity has helped business pursue its collective interests in the political arena, to participate in the provision of collective goods important for restructuring such as skill formation and to help avoid the kind of destructive price competition that has plagued adjustment in other countries while at the same time promoting export competitiveness (Esser, Fach, and Dyson 1983; Soskice 1992; Katzenstein 1989a; Vitols 1995). Perhaps best captured in the phrase 'conflictual partnership' (Miiller-Jentsch 1991), labour - through industrial unions at the sectoral level, works councils at the plant and company level, and employee representation on the boards of larger companies - has cooperated in the often drastic measures involved in adjustment without losing their capacity to pressure employers to take the 'high road' and to mobilise the rank-and-file when the integrity of the industrial relations system is threatened (Streeck 1992;a Miiller-Jentsch 1995; Wever 1995). Finally, the state has contributed by providing a corporatist regulatory framework supportive of collective action by both labour and capital, by funding important elements of the 'institutional infrastructure' for competitiveness such as research institutes and day-release schools for the dual training system, and by subsidising the costs of' adjustment through early retirement pensions and short-time work allowances (Esser 1983; Vitols contribution to this volume). Although each of these three actors is potentially powerful enough to disrupt the system, their cooperation has been 'rewarded' throughout the 1970s and 1980s through export success and reasonable profits for business, high wages, a high level of income equality and a moderate level of unemployment for labour, and moderate debt levels and a strong balance of payments position for the state.

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THE GERMAN MODEL IN THE 1990s

It would of course be incorrect to say that this process of adjustment was not accompanied by considerable discord considering the correct strategy to follow; Katzenstein (1989b: 5) for example notes that swings of opinion on the viability of the German model resemble a fever chart. However, the pressure for reform created during the recessions in the mid-1970s and early 1980s has paled in comparison with the level of criticism of basic: economic and social institutions generated since the exhaustion of the 'unification boom' of 1990-92. Since then economic growth has been less than satisfactory; the 1992-3 recession was quite sharp, with real GDP in the first quarter of 1993 two percent below the previous year's level. The recovery since then has been quite modest, with annual growth of about 2 percent in 1995 and the first three quarters of 1996 after 3 percent growth in 1994. Business profitability reached a post-war low of 1.9 percent of sales before taxes in 1993 and increased only to 2.4 in 1994 and 2.5 in 1995 (Deutsche Bundesbank 1996). Of greater concern to the public at large, however, has been the dramatic deterioration in the employment situation; registered unemployment had risen by December 1996 to over 4 million persons or 10.8 percent of the labour force, the 'highest levels seen since 1933' as ominously reported by the Financial Times. The domestic debate over the causes of the current crisis have been dominated by large sections of the business community and liberal-conservative ruling coalition. They have focused on the increasing unattractiveness of the institutions of the German model and 'Standort Deutscbhnd' (production location Germany). These criticisms have focused on the unions and the state. Critics argue that German employers face a major cost disadvantage relative to other countries due to high wages, social security contributions and taxes on business. Labour costs are exacerbated by a generous system of entitlements, including requirements that employers provide 100 percent sick pay for 6 weeks and unemployment benefits with a net replacement rate of between 80 and 90 percent of pay. Strong unions, works councils and dismissal protection legislation have constrained flexibility in the use of labour. Because wage levels are set through industry level bargaining, employers complain that they cannot design incentive systems within the firm needed to motivate employees. Finally, the business community argues that the state bureaucracy has imposed unnecessary barriers on innovation, most notoriously in strict regulations on genetic research. In addition to the weak unemployment, profitability and GDP growth figures mentioned above, failure of Model1 Deutscbhnd is seen by this group in the rapidly growing gap between inward and outward investment, the lack of employment growth in the service sector, and chronic weakness in 'high-tech' industries of the future such as information technology and biote~hnology.~ These critics eye the 'American model' with envy. They have initiated a far-reaching program for privatisation and the deregulation of labour, financial and product markets in order to achieve a cheaper and more flexible labour force, lower taxes and . ~ the less expensive financial, telecommunications and transportation s e r ~ i c e s In
2 See the recent annual reports of the German Council of Economic Advisors (Suchverstandige~~rc~f) for a more extended treatment of these criticis~ns. 3 See for example the series of articles on 'Modell A~trerika'run by Wirscl~r~jiswocl~e, the main German business weekly, in 1996.

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political arena, Chancellor Helmut Kohl has announced an initiative to cut unemployment in half by the year 2000. To achieve this goal he has pushed through legislation to weaken dismissal protection, to lower the statutory minimum requirement on employers for sick pay from 100 percent to 80 percent of normal pay, to reduce unemployment and income assistance benefit rates and eligibility for early retirement pensions, and to deregulate financial markets and increase the supply of 'risk capital ' In addition, commissions have been established in order to develop proposals to reduce the cost burden on employers through the fundamental reform of the tax and social security systems. In the collective bargaining arena, the increasing desire of large companies to offer customised incentives to highly skilled workers and lower the wages of the unskilled have led to proposals to significantly weaken the cornerstone of the German system of coordinated bargaining, the sectoral-level collective agreement (Fliichentnrifvertrag) (Carlin and Soskice 1997). Impatient with the pace of reform, record numbers of companies have left or threatened to leave employers' associations in order to negotiate company-level agreements; this phenomenon of Verbands-ucht, which has been particularly strong in east Germany and during the 1992/3 recession, has raised the specter of the loss of the coordinating capacity of capital, one of the cornerstones of the German model (Sylvia 1997). While not sharing the far-reaching deregulationist agenda of the business community and the governing coalition, academics more closely associated with the unions and social democratic party have contributed to the pessimism about the survival capacity of German institutions. Faced with American competition in hightechnology industries and East Asian success in upgrading the quality of massproduced consumer goods, they see little room for product market strategies emphasising incremental innovation in established technologies. One view is that the declining relative importance of high value-added niche markets in traditional industries is leading to an 'exhaustion' of the potential of the German model (Streeck 1996). While German companies have long been leaders in established science based industries such as pharmaceuticals, chemicals, and mechanical engineering, German companies are losing their competitive edge now that the pace of technological change has quickened and need a radical change in the deep conservatism of their business strategies. 'Imitate and improve' innovation strategies are no longer adequate given shorter product life cycles Uiirgens and Naschold 1994). The risk-averse and inward-looking nature of long established and tight interfirm networks do not provide sufficient sources of new technology necessary to survive in an increasingly globalised and dynamic competitive context (Kern 1996). Others note that the German apprenticeship system provides skilled workers with deep knowledge within particular vocations, but not broad skills needed to work effective in the polyvalent work teams that many highly innovative American and Japanese companies have successfully created (Herrigel and Sabel 1995). In evaluating the problems and prospects of the German model in the 1990s, the editors of this special edition, both of who are non-Germans with a long familiarity with Germany, have been surprised by the extent to which the debate has been focused on the particularities of the German case. While this nlay be attributable in

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THEGERMAN MODEL IN THE

1990s

part to the framing of the debate in terms of the 'uniqueness' of Model1 Deutschland rather than on the institutional preconditions of high-quality incremental innovation, it is nevertheless striking that the German debate parallels a general discussion across the advanced industrial countries about the inadequacy of 'their' current models and, furthermore, about the decreasing effectiveness of industrial policy due to globalisation and increasing economic complexity. This evaluation is guided first of all by the premise that, while the effectiveness of older forms of industrial policy may be decreasing in this new environment, this is not to say that the potential and desirability of newer forms of national industrial policies has disappeared. In the 1950s, 1960s and 1970s, processes of industrial restructuring were heavily shaped by state policies and institutions (Zysman 1983). In healy industries such as steel, ship-building, or petrochemicals, the predictability of the effects of industrial policies was relatively high. Governments could provide investment, organise domestic markets, offer protection against foreign competition, and champion industry abroad. These policy instruments were especially effective in influencing large, vertically integrated industries relying on mass production techniques. Large enterprises with hierarchical management structures could easily be created and supported by the state (Kitschelt 1991). New industrial policies must take into account that, in most manufacturing industries today, the modalities by which governments can influence the organisation of industry structures has become more subtle. The innovation system has become more complicated, depending on complex relationships between large and small firms as well as diffuse networks of experts linking companies with universities and other laboratories of innovation. The policy instruments used to manage the immediate post World War I1 industrial economy have become less viable. Within a more decentralised economy, the central problem has become the management of complex forms of cooperation within a market setting. Traditional industry policy instruments, such as the use of finance to support strategic industries, have been abandoned because it is difficult for governments to accurately 'pick winners'. Instead of directing technology in the classic style used by Japan's MITI throughout the postwar period, more countries are today trying to provide sophisticated technology infrastructures that subsidise the cost of innovation and facilitate cooperation benveen firms and the scientific community but do not attempt to direct its path (Liitz 1993). This volume develops an xlternative view of the 'German model' in the 1990s which has implications for both the domestic debate and for a broader understanding of the potential and limits of industrial policy. We accept the criticism that direct government policy cannot directly shape the competitiveness of industry. But this does not imply that convergence towards a radically deregulated political economy is the best or only competitive solution. Industrial policy must be conceived of in a broader sense than the traditional focus on direct state actions to promote competitiveness. Particularly within Germany, a broader set of societal institutions help influence how companies create product market strategies. In addition to the traditional focus on financial incentives through selective credit targeting and R&D incentives, these include, at a minimum, institutions influencing labour markets

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(industrial relations and education and training systems), capital markets (banking systems and nonbank financial institutions), innovation systems (institutions for RSrD and technology transfer), and the relationship between conipanies (industv associations, chambers of commerce, takeover and competition policy) (Soskice, 1992; Vitols contribution to this volume). We argue that companies engage national institutional fran~eworks to support the development of organisational competencies needed to compete successfi~lly.We examine the link between national institutional frameworks and the ability of companies to create the organisational. competencies required to support particular product market strategies. Many industries can be categorised by the type of product market strategy companies must adopt to innovate. Most high technology industries, such as computer software or biotechnology, necessitate product market strategies focusing on radical or product innovation. More established science based industries, such as chemicals or mechanical engineering, involve incremental innovation in the organisation of sophisticated production processes and long-term relationships with customers, both before and after sales (see Soskice contribution to this volunle). Each of these strategies necessitates the creation of different patterns of inter-firm relationships, decision-making structures within the company, career paths for workers and managers, and ownership relationships. For example, process innovation is usually best achieved through long-term relationships with customers and other companies, consensus style management structures, close linkages between skilled workers and engineers, and long-term or patient financial relationships. Radical innovation demands much more managerial autonomy in decision-making, the ability to quickly reorganise teams of workers, scientists, and managers within the company, more numerous strategic alliances with other companies, and, in order to support innovative small companies, the availability of large pools of high risk venture capital (Teece

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1986).
National political economies are characterisecl by con~plexesof institutions in different areas (industrial relations, capital markets, education and training, inter-company relations) which companies engage to support particular product market strategies. We argue that German companies are particularly competitive in traditional science based industries because of the existence of national institutions which support the necessary company level competencies needed to succeed in these areas. The vocational training program helps develop extensive skills among manual workers that allow them to effectively work with engineers and scientists. Long-term employment relationships are facilitated by the establishment of powerful employers associations that prevent companies fi-on1 'poaching' each other's employees. Works councils mandated by codetermination Law promote long-term cooperation between management and workers, while company law promotes consensus decision-making and long-term career paths among managers. The bank centered financial system helps support long-term product market strategies. Finally, a large complex of research institutes, links between companies and technical schools, and technological promotion fiinds provided by government support research and development, allowing new technologies developed elsewhere to be rapidly diffused throughout particular sectors.

THE GERMAN MODEL IN THE 1990s

Because most advanced industrial countries have very different national institutional frameworks, this leads to 'trade-offs' in competitive advantage - no one system support all product market strategies. The improvement in capacity to promote certain kinds of industries is likely to reduce competitive advantage in other sectors in which product market strategies are dependent on the creation of different organisational competencies (Porter 1990; Soskice contribution to this volume). For example, because German national institutional frameworks allow numerous longterm relationships and consensual decision-making styles to be created both within and across companies, they inhibit the very different organisational strategies needed to support radical product innovation (see Soskice contribution to this volume). In opposition to the view that the capacities of nation-states are waning, our approach takes a more differentiated view that state capacities are in many ways increasing. However, instead of direct support for chosen industries or companies, governments can now more usefully support broader institutional complexes that companies engage to successfully compete, such as those supporting the training, industrial relations, and research and development systems. German policy-makers are particularly fortunate in that there are numerous para-public institutions (Katzenstein 1987) linking neo-corporatist patterns of private intermediation with public oversight. The capacity of the individual firm to deal with increasing risk and information complexity is decreasing. Within Germany this deficit of the individual firm can be partially overcome by the state through supporting the infrastructure of para-public institutions. Trade associations, employers associations, unions, and a variety of public bodies such as Chambers of Commerce encourage cooperation between companies through information sharing and risk pooling. In order to contribute to this debate, the editors of Industly a n d Innovation (formerly the Journal o f Industy Studies) asked us (both researchers at the Social Science Center Berlin (WZB)) in the summer of 1995 to assemble a collection of articles on developments in German industry in the 1990s. We have gathered an interdisciplinary set of articles written by economists, sociologists, and political scier~tistsat or affiliated with the WZB, which were intensively discussed at a workshop in Berlin in the spring of 1996. Each of the articles reflect the WZB's emphasis on combining institutional and interdisciplinary analysis in explaining aspects of economic and social behavior. In keeping with the general orientation of this journal and also in the spirit of Katzenstein's (1989) earlier edited volume, we asked for articles with a sectoral emphasis. Sectors covered include airlines, automobiles, banking, steel, as well as a general analysis of high-technology industries, providing a good cross section of the German economy. They include both manufacturing and service sector industries encompassing both traditional and more advanced technologies. To provide a broader context, we also present two more general overviews of the industrial structure and institutional organisation of the German political economy. The first of these two overview articles, by Vitols, provides an institutional analysis of German industrial policy and its contribution to successful adaptation to the changing global economy and the deep world recessions of the mid-1970s and early 1980s. While others have focused on the role of inter-firm and bank-firm relation-

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ships, regional governments or cooperative labour relations as the main source of German industrial competitiveness, Vitols argues that the national government plays a key role in supporting the modernisation of industry. Although the state has in a few cases taken the initiative in sectoral restructuring or the development of new technologies, indirect and non-targeted support has been more significant. On the one hand, the national regulation of labour markets has discouraged price competition and imposed a 'productivity whip' on companies, on the other hand, through the supply of resources to sub-national and sectoral actors, the federal government has supported the investments in skills, R&D and capital equipment needed for industrial modernisation. This support of an institutional infrastructure is particularly important for the large and modern SME sector (the Mitlelst~~nd). Developments during the 1990s, he argues, illustrate both the continued success of this infrastructure in slipporting adjustment and the ultimate dependency of these institutions on strong domestic political support and adequate international demand for high quality, medium-tech products. The second overview article, by Matraves, provides an analysis of the German industrial structure in contrast with its main European trading partners. This overview confirms the long-standing consensus that Germany's comparative advantage lies in medium technology manufacturing industries such as chemicals or machine tools. Matraves shows that Germany is not losing its competitiveness in these core industries; indeed its advantage in medium technology sectors has increased in recent years. While her temporal analysis shows a marked decline in the competitiveness of higher technology industries in Germany, Matraves argues that an economy does not have to be competitive in all types of industries to be successful. She therefore concludes that the general pessimism concerning the competitiveness of German manufacturing industry is unfounded. In an analysis of developments in the banking sector, which is important both as a provider of financial services and an employer in its own right, Deeg argues that a two-sector model distinguishing between the Mittelstand and large companies must be used to asses the impact of globalisation, financial liberalisation and unification on the capacity of the banking system to support industrial modernisation in the 1990s. These trends have led to significant shifts in the financing patterns of large companies away from loans from a small number of Hausbanken (i.e. main banks with which companies have a long-term relationship) to credits from a larger number of international banks and securities-based finance; however, the most important element of the long-term investment system, long-term bank shareholdings in these large companies, has remained intact in the 1990s. Similarly, the capacity of the savings banks and credit cooperatives, the main bank groups serving Mittelstand companies, to provide long-term finance has not been significantly reduced by these changes. While this system has been important for supporting modernisatioll in traditional branches, the importance of long-term relationships at the same time represents one (but not the only) barrier to the start-up of new innovative companies. Attempts in Germany to set up special financing vehicles for high tech startups have been only partially successful. The articles by Soskice, Casper and Lehrer each examine different aspects of innovation. Soskice provides an institutional analysis explaining why German

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companies are successful in pursuing sophisticated product market strategies based on incremental innovation but have difficulties competing in high technology industries. He argues that the incentives provided by the German institutional system discourage top managers, researchers, and investors from pursuing investments in radical new innovations. However, Soskice also shows how this same incentive structure encourages actors to invest in long-term relationships with employees, financiers and other companies that lead to success in high value added mediumtechnology (or 'diversified quality production') strategies. Lellrer and Casper analyse successful cases of organisational innovation. In a balanced assessment of traditional German corporate governance model, both articles show that elements of this model can be a barrier to radical change and have been circumvented by a number of important companies in order to achieve success in the 1990s. Casper's article examines how organisational innovation in the auto industry influences the effectiveness of para-public institutions. As pointed out in earlier contributions, a distinctive feature of the German economy is the existence of a large and productive base of small and medium sized Mittelstand. companies. Para-public institutions, such as Chambers of Commerce, trade associations, and local research institutes provide a public infrastructure helping groups of Mittelstand companies develop research and development, quality control, training and other important competencies that they are too small to invest in individually. Case studies of the newest East German car production networks, however, show that Ope1 and Volkswagen, the two major companies involved, are bypassing these traditional supplierfinal assembler links and creating their own supplier chains involving minimal technical collaboration with local suppliers and the delegation rather than sharing of risks. As a result, few Mittelstand companies are engaging these para-public institutions and local and regional Mittelstand networks remain underdeveloped in eastern Germany. This paradigm, if diffused, could potentially have adverse consequences for Mittelstand suppliers in west Germany not only of the automobile industry but also of other branches. Lehrer's analysis involves changes in decision-making structures. Extending research done on the importance of co-determination rights in influencing company strategy, Lehrer notes that German company law encourages the development of similar consensus-based decision-making patterns among top management. Lehrer argues that consensus decision making patterns and career structures promoting long-term employment and functional specialisation prompted Lufthansa management to adopt strategies broadly resembling 'diversified quality production' that was used successfully in the car and machine tool industries in the 1980s; however, a DQP strategy proved nonviable when liberalisation of the European civil aviation market in 1987 forced Lufthansa to compete directly with other carriers such as British Airways. Lufthansa has in the 1990s radically restructured its organisation to compete successfully by circumventing traditional decision-making structures and imposing AngloSaxon style unilateral control, shorter-term employment and extensive job rotation across divisions. While highlighting the suitability of consensus-based decision making for supporting incremental innovation, this article casts doubt on the effectiveness of German corporate governance institutions for supporting radical change.

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All in all, the contributions to this volume support a more balanced and 'contingently optimistic' judgment about the viability and fiiture of the German model than that reflected in the domestic debate. On the basis of these contributions and a number of studies that have received relatively little attention, the following general conclusions are reached: (1) the competitiuenessproblern of German industry in its traditional area of strength - 'medium-tech manufacturing' - has been exaggerated. Companies have taken great steps to rationalise and have maintained market share in most of these industries. Furthermore, some of the 'symptoms' of weakness of Standort Deutschland - large investment by German companies abroad - are at least in part due to the attempt by companies to expand production and sales in North American and Asian markets. Furthermore, Germany does not have an absolute incapacity in high-tech as evidenced by strengths in particular sectors such as laser technology (DIW 1975). One must therefore separate discussion of the current employment problem from the competitiveness issue, a link which is oversimplified in the current debate; (2) a number of the fundamental claims made by the neo-liberal reformers regarding structural barriers to competitiveness are inaccurate or only partially true. Business taxes are not unusually high once factors such as very rapid depreciation allowances are taken into account. Furthermore, high hourly labour costs in Germany are largely compensated for by higher levels of productivity; thus unit labour costs are comparable to or lower than in the US, Japan and the UK (Koddermann 1996). Finally, the collective bargaining system has been less rigid than claimed as evidenced by the willingness of unions and works councils to support 'regulated flexibility', for example in supporting the establishment of more incentive pay and the creation of 'time accounts' for allocating working hours over longer periods of time. Thus the effect of stn~cturalfactors on the current unemployment crisis have been overestimated. Conjunctural factors have played a greater role, including the sudden reduction in the use of debt to finance unification in 1992 and the stifling of the recovery through deflationary monetary and fiscal policy imposed by the Madstrict Treaty convergence criteria for membership in the European Monetary union" (this view is to a large extent shared by Carlin and Soskice (1977)). (3) the current proposals for radical reform along the lines of the US model thus threaten to create the 'worst of both worlds' - on the one hand little additional employment in high-tech and the service sectors, on the other hand the undermining of important con~petencies in medium-technology industries. An improvement in the employment situation in Germany would thus be better served by incremental adjustments in the current system of institutions, such as introducing new cross-cutting fields of study in sciences and engineering, by improving

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4 These criteria require that the government h~idgctdeficits aniount to no more than 3 perccnt of GI>I', that
be no greater than 1 5 outstanding government debt be no higher than 60 percent o f G1)lJ, ant1 th;lt inIl;~rion percent of the level in the three best performing member states.

THE GEWN

MODEL IN THE 1990.5

11

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management education and by creating new financial institutions for venture capital hived off from the rest of the financial system. Furthermore, demand for medium-tech products might be boosted by loosening up the Maastrict convergence criteria and by growth in eastern Europe (Schumacher 1996). While the ambitions of the neo-liberal reformers are great, the most radical parts of their proposals for the 'importation' of the Anglo-American model have yet to be implemented. There are recent signs that legislative initiatives are flagging due to internal splits in the liberalconservative coalition, that business flight from associations is slowing down and that businesses are moderating their demands as restructuring succeeds and profitability recovers. Nevertheless, the potential for change in the German model remains great. Thus, while reports of the death of Model Deutschland are greatly exaggerated, the 'patient' is worthy of continued close monitoring.

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