Thursday, March 17, 2011

Will Germany's Economy Be Limited by Its "Immigration Dilemma?"

In terms of economics, Germany would appear to be one of most healthy countries in the world. It has strong growth, it did not suffer too much from the financial meltdown, and it has an enviable balance of payments. Could there be dark clouds on the horizon? Recently The Economist took a fresh look at the state of the German economy and declared it generally healthy, although with a few caveats. Tamar Jacoby provided some dark cloud focus with an article in Foreign Affairs: Germany’s Immigration Dilemma.

Starting with the brighter side, the argument is made that to truly understand the strength of the German economy one must look at its performance over a long period, such as a decade, and one must also look at growth numbers moderated by population because Germany has a declining population.

Looked at in terms of GDP growth per person, Germany is one of the leaders of the developed world. It has relatively low unemployment and moderate national and personal debt. It is also one of the strongest countries in the world in terms of exports.

These numbers put Germany in the same class as China when it comes to trade imbalances. The Economist provides insight into the importance of this positive current account balance. It is viewed as something that could a long-term problem for the country.
“.... another standout number—the country’s huge current-account surplus, which stood at 5% of GDP in 2010 and is seen by Germans as further proof of the country’s economic prowess. Germany is the only G7 economy whose share of world exports has not fallen since 2000, despite Chinese competition. An increase in net exports has accounted for no less than two-thirds of Germany’s total GDP growth over the past decade, far more than any other big economy. Net exports accounted for half of Japan’s GDP growth and only about one-tenth of China’s.”

“This is not a sustainable engine of growth. To contribute to GDP as it has in the past, Germany’s trade surplus would have to keep rising every year. That would leave Germany increasingly vulnerable to recessions elsewhere, as well as to the risk of a protectionist backlash. It is also improbable. Germany’s trade surplus has swollen only partly at the expense of other rich countries: two-fifths of the increase over the past decade was with emerging economies. Indeed, its surplus with America has shrunk as a share of America’s GDP over the past decade. But Germany does run a large surplus with the rest of the EU, where demand will be much weaker over the coming years.”

“Germany’s external surplus reflects chronically weak domestic demand as much as external strength. Consumer spending has grown by an annual average of only 0.3% over the past decade, depressed by prolonged wage restraint and high household saving. An ageing country such as Germany should save more than it invests (ie, run a current-account surplus) to build up a nest-egg of foreign assets that will pay for future pensions as the labour force shrinks. But Germany’s external surplus is too big. Much of it has also been poorly invested, in everything from American subprime bonds to Greek government bonds.”
So—we observe little income growth, a declining and aging population that saves too much, and weak internal demand—Germany is beginning to resemble Japan in some ways. Nevertheless, the article finishes on a positive note.
“The good news is that most of Germany’s growth last year did come from domestic demand, not exports. Business investment took the lead, but in the fourth quarter real consumer spending was almost 2% higher than a year ago. The lowest unemployment rate for almost 20 years is likely to push up wages this year and to encourage households to spend more of their income. A recovery which is “Made in Germany” would enable the country to keep up the pace.”
Jacoby focuses on Germany’s declining population and its need to attract immigrants in order to keep the economy growing. This issue is usually cast in terms of low-skilled workers, but the “dilemma” he refers to is Germany’s inability to attract the highly-skilled workers it needs.
“The Süssmuth commission made the recruitment of a highly skilled work force the centerpiece of its proposal to overhaul the immigration system. Already in 2001, in Germany and around the world, advances in communications and transportation were eroding the walls that once defined national labor markets, and governments were starting to grasp that they were in a race for workplace talent. Just as in the nineteenth century, when powerful states fought one another for territory and natural resources, now they were competing for brain power: the scientists, engineers, entrepreneurs, and high-end business managers who fuel the dynamism of the international economy.”

“The global race for skilled workers raged through the economic boom years of the past decade. As many saw it, Australia and Canada had the most appealing and effective immigration policies: both rely on point systems to draw international talent, selecting for immigrants with language skills and higher-than-average educational levels. Other countries soon made their own efforts to attract the highly qualified. Between 1998 and 2000, the United States more than doubled its quota for skilled workers admitted on temporary H-1B visas. In 2001, Germany made an exception to its 1973 ban on labor immigration, introducing a much-heralded Green Card to attract information technology (IT) professionals. France, Ireland, the Netherlands, and the United Kingdom soon developed similar initiatives. And in 2007, the European Union announced its ambitious supranational version of outreach to global talent: the Blue Card, designed to lure workers by, among other things, making it easier for them to move from job to job on the continent. (EU member states must incorporate Blue Card requirements in domestic legislation by June 2011.)”

“But Germany's effort to attract the best and brightest has not worked out as planned. In some cases, policymakers got cold feet; in others, initiatives failed to produce the expected results. The Green Card attracted far fewer IT specialists than anticipated -- less than 16,000 over three years. A push to create a German point system was derailed in 2004. The landmark immigration law that went into effect in 2005 created several new employment-based visas for highly qualified scientists, engineers, health professionals, university teachers, and managers (amendments passed in the years since have made entry easier for international students and investors). But the response has been underwhelming. Only a few hundred immigrants take up Germany's offer of permanent residence each year: in 2009, just 169 did. Another few thousand knowledge workers enter annually on temporary visas. University students find Germany more attractive: 60,000 are now arriving each year. But at the end of their studies, only some 6,000 of them choose to stay. And indeed, for several years now, more people have left Germany than have entered the country with an eye toward settling there.”
Is there something about Germany that discourages people from coming and staying? Only 169 of these skilled immigrants decided on permanent residence in 2009?

Jacoby says there are a number of factors that concern potential immigrants to Germany. The foremost is probably German history. The legacy from the Nazis and World War Two is probably of declining importance, but the more recent history is not very comforting either. Germany welcomed a large number of what they referred to as “guest workers” in the 60s and 70s. Given that descriptor, they probably assumed they were temporary visitors who would eventually return home. Most ended up staying and Germany still needs them. Many are Arab or Turkish in background and, not surprisingly, they have not integrated well into German society.

A recent book by a prominent and respected author crystallized the dissatisfaction with the state of affairs and created an environment where some sort of governmental response is required.
“Months after its publication last August, Thilo Sarrazin's book, Deutschland schafft sich ab (Germany does away with itself), is still a runaway bestseller in his native country. The book makes an apocalyptic argument -- that immigrants are destroying Germany. In Sarrazin's view, most of the country's large Arab and Turkish populations are not just unwilling but also unable to integrate, and the nation must take urgent steps, starting with a radical overhaul of its welfare system, to avoid a hastening demise.”

“According to one survey carried out two months after the publication of the book, 36 percent of the public felt that Germany was being "overrun by foreigners"; 58 percent thought the nation's four million Muslims should have their religious practices "significantly curbed." And the roiling national debate is opening old wounds. Even many highly successful immigrants with deep roots in Germany say that they feel they will never be fully accepted. As one rising young Berlin academic born in Turkey told me, ‘I'm a German citizen. I have a German child. I'm devoting my career to educating the young people who will run the country in the next generation. But I'm still seen as a foreigner’."
There are more structural issues about German society that are of concern to the educated who might have the choice of staying. Although it is successful at attracting foreign students, few chose to remain after graduation.
“Foreign university graduates thinking about staying in Germany worry about the entrenched seniority systems that often make it hard to rise in German companies. Others are concerned that they will not be able to penetrate German social and professional networks, or that speaking anything short of perfect German will stymie their careers. Still others worry about the myriad regulatory obstacles to starting their own businesses.”
Germany would seem to have many things to offer: a strong economy, good wages, its businesses are heavily involved in the high tech arenas, it has a solid educational system, and its universities are free. Jacoby argues that the country must come to terms with this problem because it has already become an economic handicap—one that will only get worse.
“According to one recent survey, by the Association of German Chambers of Industry and Commerce, 70 percent of German companies are having trouble finding master artisans, technicians, and other skilled laborers. The Association of German Engineers reports that there are 36,000 unfilled engineering positions across the country, and an association of IT companies estimates that there are 43,000 openings in the information field. The labor problem is particularly acute among the smaller, often rural manufacturing companies known as the Mittelstand, which sustain Germany's exporting prowess and provide 70 percent of its private-sector jobs. According to an estimate by the German Institute for Economic Research, the skilled-worker shortage is costing the country 15 billion euros ($20 billion) a year. If the problem is left unattended, these numbers are only going to get worse: the German fertility rate has fallen to a startling 1.38 children per woman, and the existing work force is aging rapidly -- by 2020, the carmaker Daimler expects that more than half its workers will be over 50 years old.”
Every country has an interesting story to tell. Germany is no exception.

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