Mittelstand: A German Lesson for US

             Lately a lot has been said about the barren US manufacturing landscape. During the past decade, US manufacturing employment has fallen by one-third while manufacturing output has remained roughly constant. Media Pundits and Politicians have attributed the manufacturing job losses to low wage emerging countries, lower trade barriers because of globalization and also to ‘unfair’ US trade policies. But then we can also say that Technological improvements and not globalization is reducing the US manufacturing employment.

I understand that US manufacturing sector (the ‘rust belt’) is going through a rough patch, but it’s no reason to blame, globalization or China, to be precise. During the cold war, fear mongers magnified the threat of USSR, in 1980’s it was Japan and now it’s China. China is the world’s largest exporter? True; but until last year China was number two. That’s right, and you know who was number one…a colleague of US in G-8, Germany. Germany with its high wages and generous social benefits was able to outdo both, China and the U.S in exports until recently.

Germany had its own economic issue; first, integrating East Germany and then creating a Euro zone with ‘not-so-stable’ economic neighbors. It went through some weak economic growth in early 2000, but it didn’t blame external threats, instead it concentrated on its own economic and trade policies, especially focusing on Mittelstand- family-owned companies with fewer than 500 employees and annual sales of less than 50 million euros. We might think that Germany is all about global champions like Siemens and Mercedes Benz, but it's the Mittelstand that employs more than 70 percent of German workers and contributes roughly half of the country's GDP. Since late 60’s Germany’s average un-employment rate has been around 10%, but the recent data by IMF shows that Germany’s unemployment is down to 8% and is the fastest growing economy in the G-8. Germany did it by exporting high quality, high tech and well-branded goods.

China was so impressed with Germany that when IMF statistics showed that China will be number one exporter, its leaders proclaimed that they were number one only in ‘quantity’. They said China’s goal was to follow in Germany’s path to become an exporter of ‘high tech, high quality, well-branded goods.’ And all these time we thought that China was gunning after US by imitating its trade policies.

There is no doubt that US is still the world’s largest economy and will remain so for a while. But it has to start putting its house in order. I am not saying that Mittelstand is ‘The Answer’ to US’s manufacturing questions; absolutely not. But its high time US policy makers get serious about the labor situation and at least take a lesson or two from the other ‘successful’ economies and instead of blaming China for its unemployment problem, focus on its own micro-economic policies. Just as President Obama followed Germany in “Cash for Clunkers” (That’s right, Germany had put to use this idea first) the American economy might take some manufacturing pointers from Germany as well.