German economy in 21st century reforms: Analysis of the factors of production and other policies

Abstract

The growth of any major economy lies in the hands of its factors of production. The better thes e are put into use, the higher growth an economy can achieve. It includes both the quantity / availability of the resource as well as how effectively the resource has been put into use. It is fair to assume that every economy would want to maximize the output potential for each economy. The pace at which economic change is accelerating, complexity of decision making is growing at an exponential rate. With Capital market integration, deepening in global trade, ICT enabled accelerated growth, the situation is far more dynamic what it used to be. In this backdrop, it has become essential to understand the key factors which drives the growth. KLEMS framework attributes the overall growth and productivity to these five factors Capital, Land, Energy, Material and Service Inputs as the game changer. On the one hand, it has become crucial to study the relationship between skill development, technological enhancement, investment & innovation and on the other hand to gauge the productivity improvement through these factors. Analyzing any economy from the lens of KLEMS framework helps in evaluating the interaction between multiple variables, a very fundamental factor driving policy decisions. A big economy like that of Germany can be studies from multitudes of angles. However, an analysis through the KLEMS framework not only gives an aggregate picture but helps in diving deeper into individual industries and their contributions to Industry growth. From being called as the Sick Man of Europe (Economist, 2004) to being the economic driver of European Union, having the highest GDP in Europe and fourth largest GDP in the world, Germany has single-handedly prevented the Eurozone from falling back into recession and has been the only nation which was wealthy enough to save the Euro. The country has set an example by recovering from its worst recession since second world war in just two decades. As compared to other European countries, though Germany experienced a sharp drop in GDP, it witnessed almost negligible unemployment uptake during the Great Recession of 2008-09. A study of the German economy will give us insights about how they have managed to keep their productivity high and some of the policies can be applied to the India as well. For example, a major reason for the economic evolution of Germany can be attributed to a set of legislative market reforms in mid 2000s called the “Hartz reforms” (Dustman, 2014). The unemployment did not majorly impact Germany due to its lower labor costs. Apart from the labor reforms, the export sector and the manufacturing sector has been a huge boost to the German economy. Lately, automotive, mechanical, electrotechnical and chemical engineering are the industries which are flourishing in the German economy. Strengthening of Euro has helped it as most of its trading partners are based in Europe. With the focus of the Indian government on initiatives like “Skill India” and “Make in India”, these labor reforms and trade policies can help the Indian government to achieve higher growth rates and more importantly, sustain them.