Moreover, the German workforce today has the shortest working hours and longest holidays of any country. Asia-Pacific industrial competitors with wage costs per hour a sixth of Germany’s are an increasing challenge. And Germany is relatively more reliant on manufacturing industry than most advanced economies.
It is thus an open question how long present prosperity can last under these conditions. The temptation will grow for Germany to follow France in pressing the European Community in the direction of protectionism. But that would be self-defeating, since protectionism reduces the incentive for efficiency at home while stimulating it overseas.[123] It should be added that this analysis is by no means ‘anti-German’. Indeed, the more corporatist model of capitalism which Germany has come to represent only works as well as it does because of the remarkable qualities of the Germans.
THE TEMPTATION OF ‘STABILITY’
The attraction which the more regulated German model of capitalism offers is not solely the result of Germany’s own impressive economic performance. It also stems from that perpetual desire for security and stability which tempts policy-makers to abandon the risky unpredictability of free markets for the misleading reassurance of planned order. This explains the present tendency to argue for state intervention in industry long after the economic theories justifying it are discredited. It also explains two other current preoccupations — first, the search for a new framework of stable currencies policed by international institutions on the lines of Bretton Woods, and secondly the argument that full-blooded protectionism offers the only hope of withstanding the disruptive competition of new low-cost producers. Each of these viewpoints is advanced by distinguished advocates — in the first case Paul Volcker’s Bretton Woods Commission, in the second Sir James Goldsmith.
The pursuit of exchange-rate stability has done great damage during my political lifetime. Nigel Lawson’s shadowing of the Deutschmark between March 1987 and March 1988 undermined my own Government’s anti-inflation policy. Subsequently, the pursuit of rigid parities within the Exchange Rate Mechanism of the European Monetary System plunged Britain and other European countries into an unnecessarily deep recession. But in any case, as Professor Milton Friedman has pointed out, the experience of pegged exchange rates under the Bretton Woods system devised in 1944, which finally collapsed in 1971, hardly justifies the plaudits it sometimes receives.[124] In fact, it only worked as intended for eight years — from 1959 to 1967 — and even those years were not free from exchange-rate changes. Moreover, the inflation of the 1970s actually began in the last few years of the Bretton Woods system. Its final breakdown reflected both that inflation and the unwillingness of sovereign states to subordinate their interests to an exchange-rate rigidity which transmitted the inflation or deflation of other economies to their own. All experience has shown that attempts to peg exchange rates do not in fact increase stability — or, except in the very short term, confidence; they simply ensure that adjustments take place against a background of economic crisis and political discord. Talk of ‘recreating Bretton Woods’ is nostalgia which we cannot afford — and indeed we cannot even achieve. As Sir Samuel Brittan, a distinguished former supporter of the ERM has recently written: ‘Fixed, but adjustable, (pegged) exchange rates of the Bretton Woods or ERM types are probably no longer a realistic option; and a straight choice has to be made between floating and a full monetary union with partner countries.’ For reasons I advance elsewhere, my choice is firmly for floating rates. Sir Samuel will probably plump for the other option — but we both realize that there is no stopping at the halfway house.
I have more sympathy with the analysis of the international economic scene offered by Sir James Goldsmith.[125] Sir James is right to draw attention to the challenge posed to high-cost, overregulated European industry by foreign competition, which he sees as inevitably leading to falling real wages and soaring unemployment — unless we erect protectionist barriers around the advanced economies of Europe. Research suggests that competition from the emerging markets has indeed begun to depress real wages and in Continental Europe is also raising unemployment.[126] These are real problems with which we must deal.
But the benefits of free trade do not depend upon participating countries having similar cultural or institutional arrangements, nor on their having the same economic potential. The mutual benefit comes from exploiting the comparative advantages enjoyed by different countries. And Sir James probably exaggerates the immediacy and scale of what he calls ‘a completely new type of competition’ from four billion people who are coming into the world economy. The figure of four billion seems to include the entire population of the world outside the developed countries, men, women and children. Not all of these are coming on to the world economy any time soon, and the economic potential of the low-paid workers in China and the former Soviet bloc who are competing with us is very varied.
Of course, the experience of the Asian ‘four tigers’ suggests that some at least of these newly-industrializing countries will enjoy a very rapid rise in industrial skills and living standards. But two consequences will flow from that: they will cease to be low-wage competition, and they will increasingly provide a market for the exports of other nations, including Western nations. Competition will once again work for the benefit of all.
It could be, admittedly, that the West, even while prospering in absolute terms, might fall behind these new competitors in relative terms. That would be no great tragedy; but in any case for several reasons it is unlikely to happen. The most important one is that, the more advanced an economy, the smaller labour costs are as a proportion of total costs — especially in manufacturing industry where the developed world is allegedly most vulnerable. (This is one beneficial result of the automation revolution, which poses problems in other respects.) And in both advanced manufacturing industry and in services, where the West also has a relative advantage, investment in human capital tends to be disproportionately important. Here, again, the West scores, since our unskilled labour tends to be more skilled than their unskilled labour — not to mention that developed countries produce many more scientists, technicians, engineers, economists, accountants, bankers and other professionals at the very highest level. Indeed, many of their ablest competitors in developing countries emigrate to Western countries when they are allowed to do so.
None of which is to say that the developed world will not fall behind the Pacific Rim countries if it continues to pursue policies which neglect or positively waste the talent available to us. Sir James himself argues vigorously, and I heartily concur, that well-intentioned policies of indiscriminate welfare ‘reduce the self-reliance of citizens and of their families by converting them into dependants of the state’. We are in danger in Britain and other European countries of following the example of the United States and creating a large permanent ‘underclass’ living off a combination of crime, welfare and the black economy. Such policies are increasingly under fire from informed opinion, but they are so entrenched politically and supported so stubbornly by special-interest lobbies that only the cold wind of economic reality will persuade us to reform them.
124
Milton Friedman, ‘Out of Bretton Woods: Free-Floating Anxiety’,
126
I am grateful to Professor Patrick Minford for drawing my attention to this research, which he has conducted.