The Secret Sauce of the German Economy

A few weeks ago a new episode of the famous podcast of Freakonomics dealt with an extremely interesting question—what makes the German economy so successful? Freakonomics is an American podcast and dealt with the issue from an American point of view. It raised certain issues, such as identifying the secrets of the German economy and discussing whether or not America should steal some of them (or copy them).

http://freakonomics.com/podcast/secrets-german-economy-steal/

First of all, what are the secrets of the German economy?

The German Economy

Germany has the biggest economy in Europe and the fourth largest economy in the world, but what’s more interesting is that it is essentially an exporting machine.

In 2016, Germany was the biggest exporter in the world and recorded the highest trade surplus. What does Germany export? Vehicles, machinery, chemical goods, electronic products, electrical equipment, pharmaceuticals, and a large variety of manufactured goods. Overall, the German economy has been functioning well for a long period of time and survived global economic crises better than most economies. Today, the German economy seems to be one of the economies least prone to a downturn. In July 2017, the International Monetary Fund gave the country’s economy “yet another bill of good health.”

So, what’s the secret sauce?

The German economy has several unique characteristics. One thing that might seem very strange in American (or global) eyes is that 99 percent of all German companies belong to the German “Mittelstand”—small and medium-sized enterprises that are mostly family owned.

What is stranger is that the unions in Germany have representatives on the board of the company and participate in the decision-making process together with the firm’s executives. The system in Germany is very collaborative, and employees have more power than in most non-German companies, including the power to leverage their benefits and salaries.

What might also seem a bit odd is the issue of trust. People in Germany apparently trust each other. Many successful societies are built on trust, and Germany is definitely one of them. People trust each other to work for the greater good, and different components of the company trust each other to work for the benefit of everyone. This creates a harmonious and collaborative environment in companies, which helps them succeed in the long run.

The bottom line is that organized work (the unions) and trust are the two key factors for Germany’s success. But are the two really different?

Trust

Trust is one’s willingness to rely on someone else. It seems obvious, but in most cultures trusting others is not that common. Countries that enjoy trust the most are Northern Europeans—Scandinavia, Holland, and Germany. No wonder that these are also the countries that have a quite similar method of organized work, where employees are a key part of the company’s decision-making process, and fruitful collaboration exists among owners, executives, and employees.

Trust is not something that evolves within a short period of time. The basis for it lies in years of legal and financial foundations that led to this trusting environment. Efforts to create the same business culture in other locations have failed in the past not only in developing countries but also in some of Germany’s European neighbors.

Unlike Freakonomics broadcasters, I believe that trust and unions are not different keys to success, but that trust is the key to success that leads to all the others (among them the unions). Trust can incentivize the economy in various ways:

  • Managers can trust their employees—fewer resources are needed for managing operations if the manager knows that his employees can be trusted. It can be in highly skilled functions, where junior employees are trusted to handle their time efficiently, and also in low-skilled positions, where employees do not need micromanagement that is common in other countries.
  • Companies can trust the government—or at least find ways to collaborate, as companies and unions do in Northern European countries. This enables a more stable environment that makes it easier to run a company without frequent changes in regulations, taxes, and other barriers.
  • Friendly environment to do business—trusting other people makes it easier to conduct business with them—buying, selling, and trading. If you trust the other party to sell you exactly the product that you need, you would be more eager to trade more, which reduces friction in the economy and makes it more specialized and effective. Everyone does what they’re best at doing and buys products/services from others.

Trust creates a friendly and collaborative environment between all components in the industry-government, shareholders, companies, and employees (including unions). This extremely stable environment perhaps lacks the secret sauce of the American economy—innovation and ultradynamics of the economy—and it is not necessarily suitable for every country, but it definitely fits Germany. Trust Germany. Trust the process.

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