The conceptual framework of this paper assumes that macroeconomic performance depends on the interplay between the economic environment and policies. Declining labor shares, wage moderation, and employment performance in Germany and the Netherlands have been presented. A number of policy changes are under way, but additional reforms may be needed to fully reap the benefits of the new economy. The tax reform package marks a radical and constructive shift in German tax policy, and the pension system requires a sea of change in public policy reforms.


The conceptual framework of this paper assumes that macroeconomic performance depends on the interplay between the economic environment and policies. Declining labor shares, wage moderation, and employment performance in Germany and the Netherlands have been presented. A number of policy changes are under way, but additional reforms may be needed to fully reap the benefits of the new economy. The tax reform package marks a radical and constructive shift in German tax policy, and the pension system requires a sea of change in public policy reforms.

III. Prospects for the “New Economy” in Germany31

A. Introduction

57. The recent economic recovery in Germany has led many observers to ask whether this upturn will mirror the “new economy” experience over the last five years in the United States, which has been characterized by sustained robust growth and low inflation. The concept of the “new economy” is of an acceleration in technical change in which rapid investment and use of information technology transforms business practices leading to new breakthroughs and wider adoption and use of technology. The practical macroeconomic consequence is typically seen as higher productivity growth that some have suggested could be quite persistent. Thus, while the “new economy” has several connotations, most studies of the phenomenon attempt to discern a link between the higher productivity growth and investment in new technology. Some of these studies suggest that the increase in productivity growth in not just cyclical but is more enduring.

58. To date, there is little evidence of the “new economy” in Europe—at least when examined using the traditional macroeconomic data and methods. It is difficult to draw firm conclusions, however, as the national accounts data produced in most European countries are not comparable to the United States and not well-suited to accounting for the potential role that information technology may have played in productivity growth. These data limitations are also evident for Germany.

59. More circumstantial evidence, however, suggests that Europe may be on the cusp of the “new economy” and Germany is in the forefront on a number of dimensions. For instance, the underlying infrastructure supporting the use of information technologies is considered state-of-the-art and geographically dispersed. Deregulation of the telecommunications and electricity industry has also aided adoption of new technologies by cheapening some main inputs. However, while Germany is farther along than many of its peers in continental Europe in some dimensions, it ranks behind the Nordic countries, the U.K. and some Asian countries on other dimensions. Thus, the evidence is mixed as to its readiness to take advantage of all the “new economy” has to offer.

60. Moreover, there are a number of structural characteristics of the German economy that may stand in the way of a full absorption of the traits that typify the “new economy.” The German labor market has yet to allow the wage differentiation necessary to best utilize the diverse skills of its labor force most efficiently. The flexibility of U.S. labor markets is cited as an important element in the rapid adoption of technology, even appearing to spur the demand for lower-skilled workers despite the emphasis on a highly skilled workforce for the “new economy.”32 The administration burden placed on new companies may discourage the formation of corporate structures that reward entrepreneurs and quickly adapt to the changing business practices inherent in the use of new information technologies. Lastly, in the U.S., the financing of “new economy” firms frequently takes the form of venture capital and private equity—both of which are relatively underdeveloped in Germany where bank financing (loans) is usually the first infusion of capital for most small- and medium-sized enterprises.

61. This chapter is organized as follows. First, the evidence for the U.S. “new economy” is briefly presented. It is worth emphasizing that there is a debate on the interpretation of the increased productivity growth in the United States during the 1990s—focusing on the relation of productivity growth to the use of computers and its sustainability.33 Second, the evidence regarding labor productivity growth is presented for some European countries, and specifically for Germany and France, to see whether there are any hints in the macro data of a “new economy” in European economies.34 Third, the chapter examines Germany relative to other countries, attempting to discern the degree to which some of the preconditions for the development of the “new economy” are present. And lastly, the chapter takes a more prospective angle and points to potential impediments or blockages to the positive impact of new technologies in Germany.

B. The Background: The U.S. Experience

62. While the term “new economy” has several meanings, this chapter uses it to designate the buoyant performance of the American economy in the latter half of the 1990s—high output growth with no significant signs of inflationary pressure. The “new economists” suggest that the rapid growth in investment in information technology (IT) equipment in the 1980s and 1990s has altered the nature of business, leading to higher productivity growth throughout the economy. Such rapid productivity increases has produced steeper rates of growth for potential output. The higher potential output, in turn, permitted higher actual output growth without putting pressure on the economy’s resources, alleviating the short-run trade off between output growth and inflation rate. Most of the emphasis, therefore, has been on the measurement of the higher productivity growth in the United States and whether it can be linked to high-technology equipment, either through the production of such equipment or through its use throughout the economy. Some enthusiasts have viewed the acceleration in productivity as permanent, placing the economy on a sustainable higher growth path akin to that attained during the industrial revolution.

63. Economists agree that the U.S. economy witnessed an acceleration in labor productivity in the latter half of the 1990s of around one percent per annum, but they view the source of the acceleration differently. While the linkage between productivity and IT investment can be accounted for in several ways, most believe that at least some of the increase can be traced to the production of IT (Box III-1). Evidence of this effect is present in estimates of the growth in total factor productivity (TFP) which, according to Oliner and Sichel (2000), have picked up from about ½ percent in the 1991–95 period to 1¼ percent in the 1996–99 period. According to the same study, about one-third of the increase in TFP can be attributed to the computer sector plus the computer-related semiconductor sector. Even the skeptics give credence to this evidence. After estimating the structural acceleration in labor productivity which eliminates increases associated with cyclical effects, Gordon (2000) estimates that about half of the acceleration in output per hour is due to TFP growth, most of which is captured by the computer and computer-related semiconductor manufacturing sector. When Gordon (2000) examines output per hour excluding durable manufacturing, he finds no evidence of accelerated TFP growth and concludes that its absence is evidence that the “new economy,” at least in the sense of spillovers to sectors outside durable manufacturing, is not present.35

Accounting for the “New Economy”

Most analyses of growth accounting and productivity start with an economy’s aggregate production function in logarithmic form, whereby growth rate in output, y, is attributed to contributions from the growth of capital, k, labor, l, and total factor productivity, a.


In equation 1, the α terms are income shares; under neoclassical assumptions these income shares equal the output elasticities for each input and they sum to one due to constant returns to scale. The q represents changes in worker quality and a is the growth rate in total factor productivity (TFP). TFP identifies the portion of output growth left after accounting for growth in capital and labor.

Oliner and Sichel (2000) and others then subtract labor growth (worker-hours) from output growth to obtain labor productivity growth and split up the components of capital into the contribution from the high tech equipment (information and communication technology) sector, ICT, and other sectors, o, as described in the equation below:


First, labor productivity may have increased in the 1990s because of “capital deepening”, the bracketed term. The contribution of changes in the high-tech capital/labor ratio, αICT(kICT−l) and be interpreted as the contribution of changes in the use of high-tech equipment. The contribution of productivity gains in the production of computers and semiconductors to aggregate labor productivity growth shows up in TFP changes, a.

64. Oliner and Sichel (2000), among others, further claim that the use of information technology by U.S. firms has played a significant role in the acceleration of labor productivity in the second half of the 1990s. The use of information technology is captured by an examination of “capital deepening,” that is, primarily the contribution of changes in the high-tech capital/labor ratio. Oliner and Sichel (2000) show labor productivity growth went from 1.6 percent in the first half of the 1990s to 2.7 percent in the second half (Table III-1). Of this acceleration, about one-half can be accounted for by the increased use of high-tech goods—capital deepening. Oliner and Sichel (2000), who use a broader definition for the stock of high-tech goods than most other authors, show that capital deepening outside the high-tech sector had no effect on the acceleration of labor productivity. Despite the difference in the definition of the high-tech capital and the use of different approaches, Whelan (2000) and Jorgenson and Stiroh (2000) also find that the use and the production of computers boosted labor productivity growth in the second half of the 1990s.

Table III-1.

Acceleration in Non-Farm Business Labor Productivity, 1991–95 to 1996–99

(Percentage points per year)

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Source: Oliner and Sichel (2000)

65. Estimates of TFP are, by construction, residuals and as such also contain the errors in measuring output. The TFP estimates in the United States and other countries are likely to be biased down because of inadequate measures of output growth in service sector industries. As in the computer industry, many service industries have undergone substantial changes in their business practices (e.g., the finance, insurance and real estate industry). However, unlike data for computer production, the official statistics in the United States do not control for quality changes when measuring the price of these services and it is likely that they overestimate service price increases since the quality of such services is thought to be improving, in part owing to the use of computer technology. Therefore, real output measures obtained by using these prices to deflate nominal expenditures grow at a slower rate than “actual” production and total factor productivity growth in service sector industries will be underestimated. If one believes that the greater proliferation of high-tech equipment in the second half of the 1990s has a positive impact on TFP growth in the service sector, the above-mentioned measures of TFP acceleration in non high-tech sectors will be “too small.”

66. In conclusion, while there continues to be differences among scholars about the exact attribution of the increased productivity growth in the United States, most agree that information technology has played a decisive role. Most of the recent studies point to the increase in capital deepening as one of the avenues through which IT increases labor productivity. The actual production of information technology, in the form of mostly computers and semiconductors, has also made a contribution though there is more debate about the actual amount. How sustainable the acceleration in labor productivity is, is still largely opinion and will await observation over a longer time period.

C. The Effect of IT Investment on European Output Growth

67. In contrast with the United States the “new economy” is at best only slowly making an appearance in most of Europe. The growth in labor productivity in the business sector, which was higher in the euro area than in the United States in the 1970s and 80s, has declined in recent years, rather than increased (Table III-2). This decline in part reflects policy choices, most notably the desire to reintegrate low-skilled labor into the labor force that has in recent years been particularly successful in France. By contrast, the rise in productivity in the 1991–1995 period for Germany also reflects a labor shakeout in which the employment of lower skilled workers fell and eastern German productivity grew following unification.

Table III-2.

Labor Productivity Growth in the Business Sector

(Average annual log differences within the period shown multiplied by 100)

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Source: Fund staff computations.

Germany and Euro area: OECD Analytical Database; output includes agricultural sector; averages of 1992–99 and 1992–95 were used to control for German unification.

France: OECD Analytical Database for output and employment, hours worked from DARES (Direction de l’animation de la recherche, des etudes et des statistiques).

USA: Oliner and Sichel (2000); output is for the non-farm business sector.

68. Statistical problems make an assessment of the impact of IT on productivity growth difficult and few countries outside the United States have completed analytical studies (Box III-2).36 Circumstantial evidence is typically obtained by observing the share of investment in IT capital. Recent data on the share of investment in information technology is already somewhat dated, but generally shows that the share of investment in information and communication technology equipment (ICT) in European countries—with the notable exception of the United Kingdom—to be significantly smaller than in the United States at least until 1997. Overall, from 1985 through 1996, all of the G7 countries have been adding to their information technology capital stock at double-digit rates. However, with the exception of the United States and Canada, the rate of ICT capital-build up decelerated in the first half of the 1990s.37

69. In conclusion, statistical difficulties prevent a breakdown of labor productivity growth in terms of the contribution of IT investment and make cross-country comparisons suspect. Differences across countries in the national accounts capital series and price deflators, in particular, frustrate attempts to estimate TFP.38 With respect to Germany, the use of different price deflators imply measures of “capital deepening” and TFP gains are likely to be underestimated relative to the United States. In this case, the “new economy” gains in productivity may well be present in Germany, but data quality may prevent their detection.

Data and Comparability Problems in Measuring the “New Economy”

Several statistical issues are encountered when attempting to link productivity growth with the increased production and usage of computers. One of the largest pitfalls is the appropriate measure of prices of technology goods to be used to deflate nominal values to obtain the real output and investment in the technology sector. Because the quality of computers and related peripherals has improved so rapidly a computer purchased today has much more computing power than one purchased even a year ago. Thus, using actual prices distorts the value of the computer output and other methods must be utilized to estimate computer prices. In the United States, unlike Germany, “hedonic” prices are used which attempt to value computer characteristics rather than the computer unit itself.1 Recently, the Bundesbank estimated that computer equipment prices fell by four-fifths in the United States from 1991 to 1999 whereas the official statistics for Germany show a fall of only one-fifth. By their calculations, if one used the U.S. price deflators for computer equipment in 1998, German IT investment would have been double the official estimates. In 1999 the discrepancy was well over 170 percent. Growth rates of real expenditure on IT equipment are similarly biased—annual growth rates in the years since 1991 would be 27½ percent with the U.S. price deflators as opposed to 6 percent using the conventional approach. For comparison, the United States’ private sector experienced growth rates of around 40 percent per year from 1992 to 1999.

Other problems arise with the definition of the high-tech sector and the measurement of output. For instance, Schreyer (2000) limits his definition of high-tech investment to hardware, whereas Oliner and Sichel (2000) include software in their estimates. Other authors define the IT sector in other ways depending on the sectoral accounts of the country. It has been further observed in the United States that the difference between GDP calculations based on the expenditure-side measures of output, which reflects spending on goods and services, and those based on the income-side have widened since the mid-1990s, with the income-side showing higher growth. Though the current studies use expenditure-side measures, the income-side data raises the possibility that the growth increase is even greater than previously thought.

1 Other users of hedonic prices include France, Sweden, and Denmark. The hedonic approach estimates a function relating prices of computer “boxes” to their respective characteristics (e.g., speed, memory size, and so on). An evaluation can then be made as how much a new computer model would have cost in a previous period.

D. Germany’s Position in the Information Technology World

70. This section attempts to put Germany in perspective relative to other developed countries in terms of its production and use of information and communications technology (ICT) goods using a variety of information. It then attempts to examine how Germany stands, again compared to other developed countries, in its readiness to use ICT goods in the “new economy.” The information below suggests that Germany is not a large producer of most ICT equipment, with the notable exceptions of telecommunications goods and components. It is also a net importer of software and computer related services. Thus, if one is to detect productivity gains related to the “new economy” in Germany it would appear best to examine the use of computers through capital deepening rather than the actual production, though a sectoral analysis of the telecommunications industry would be warranted.

Production and trade of information technology goods

71. While Germany is one of the larger producers of ICT goods in dollar terms—producing about $34.5 billion worth in 1997—it amounted to only 1.6 percent of GDP. Both the United States and Japan overwhelm it, by producing about seven and six times more in dollar terms, respectively (Table III-3). Within Europe, Germany produces more than France and less than the United Kingdom. When measured as value added by the ICT industries as a percentage of GDP, as of 1996 Germany was third among fifteen OECD countries (Figure III-1). Ahead of Germany were the United States and Finland (Japan was excluded from this sample).39 Germany fares much worse in cross country comparisons when one looks at 1997 expenditures on ICT. It ranks 15 out of 19 OECD countries.

Table III-3.

World Production of ICT Goods, 1997

(US$ billions)

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Source: OECD Information Technology Outlook, 2000, Chapter 1, Table 2.
Figure III-1.
Figure III-1.

Germany: Value Added in ICT Industries, 1997

(In percent of GDP)

Citation: IMF Staff Country Reports 2000, 142; 10.5089/9781451810424.002.A003

Source: OECD Information Technology Outlook, 2000, Chapter 1, Table 1.

72. Germany appears to be relatively stronger in the mobile telecommunications and the electronic components area than in the computer sector, strictly defined. Germany was the third largest importer and exporter of communications equipment in 1998 and ranks third also as an importer of components (Table III-4) though, in terms of hardware—computers, communications equipment, and electronic components—the United States remains dominant. Germany is the fourth largest exporter of components, in line with its role as a producer of these goods. In the trade of computers, however, it ranks only sixth as an exporter, behind the large export countries of United States, United Kingdom, and Japan, but also behind the Netherlands and Ireland (not shown). It is the third biggest importer, however, of computers.

Table III-4.

ICT Goods: Leading Exporting and Importing Countries, 1998

(US$ billions)

article image
Source: OECD Information Technology Outlook 2000, Chapter 1, Table 9.

73. Germany is a net importer of software goods, as well as IT related services (Figures III-2 and III-3). It imports $0.97 billion of software and exports $0.51 billion. Ireland is the largest—exporting $3.29 billion worth in 1998—surpassing the United States. Trade in communications services and computer and information services tells a similar story, with Germany a net importer of both types of services. The flows of both imports and exports are, however, relatively great. Germany is the second largest importer in both categories and the third largest exporter.

Figure III-2.
Figure III-2.

Germany: Exports of Software Goods, 1998

(In billions of US dollars)

Citation: IMF Staff Country Reports 2000, 142; 10.5089/9781451810424.002.A003

Source; OECD Information Technology Outlook, 2000, Chapter 1, Table 7.
Figure III-3.
Figure III-3.

Germany: Imports of Software Goods, 1998

(In billions of US dollars)

Citation: IMF Staff Country Reports 2000, 142; 10.5089/9781451810424.002.A003

Source; OECD Information Technology Outlook, 2000, Chapter 1, Table 7.

74. Employment in Germany’s ICT sector has grown noticeably since 1997. Persons employed in the hardware, software, and services sector increased 6.6 percent from 1997 to 1999, compared with employment growth of 0.7 percent in the economy as a whole over the same period.40 This is more striking given that it has occurred within an environment in which manufacturing employment has steadily declined. For example, in 1998 the information industry represented 2.8 percent of all employed persons, but 21.8 percent of Germany’s total employment growth. This sector offers potential for continued dynamism and employment growth. For instance, a recent study suggested that the gains in employment could be quite large—estimates ranging from 100,000 jobs to 400,000 jobs—if flat-rate pricing was adopted for Internet service.41 Despite the employment growth, the government calculates a shortage of 75,000 specialists in the high-tech fields and, most recently, an outright call for computertrained professionals was made and the issuance of a special working visa for Russian and Indian computer experts was approved.

E. Germany’s Readiness for the “New Economy”

75. Although Germany is not at the forefront of IT production, it has a large potential to absorb IT and already has in place the basic infrastructure necessary for doing so. The information below documents some of the areas in which Germany is especially strong, as well as some areas in which it falls behind other developed countries.

76. The gradual shift to a more service-based economy among the developed countries has been associated with an increased use of ICT in this sector, serving to reinforce this trend. Services account for about two-thirds of GDP in OECD countries and about 68 percent in Germany. Foremost among the service sector in absorbing ICT is the financial services industry. In the United States, for instance, financial markets have the highest relative IT intensity index. This index measures the industry’s percentage share of information technology expenditures relative to industry’s share of GDP. Other high users of ICT in the United States, in decreasing order, are banking, education, insurance, manufacturing, utilities, and communications and media. These sectors are well-represented in Germany as well.

77. In comparison to other EU countries, Germany was above the average level of R&D expenditures as a percent of GDP in 1998, though ranked well below the leaders, Sweden and Finland.42 Another measure of potential future growth in output from ICT is to examine how much of the total business expenditures devoted to research and development (R&D) is going into the ICT sector. Data from 1997 show the share of total business R&D expenditures going into the ICT industries—office machinery and computers, radio, TV and communications equipment, and communications services—was only 13.7 percent while in Finland this measure was 40.9 percent. Germany follows ten OECD countries in this measure—in most countries about one-fifth to one-quarter of all R&D spending goes into the ITC sector.43

78. Germany is well placed in terms of its underlying infrastructure for the “new economy.” The proportion of digital telephone connections per 100 inhabitants is relatively high (57 per 100), ranking only slightly less than the United States (62) and France (59) in 1998. The jump to wireless technologies has also been enhanced by the recent auction of UMTS (universal mobile telecommunications systems) by the government. UMTS is a third generation mobile phone system that will give access to new wireless multi-media services, including Internet access via mobile phones. Its introduction will also increase the competitive pressure on line-based systems, permitting further declines in the costs of fixed-line phone calls, which have already fallen 90 percent for long-distance calls in the last two years with the partial privatization of Deutsche Telekom.44 The knock-on effects of the new UMTS licenses will also include a boost to the production of telecommunications goods and electronic components, the strongest of the Germany’s ICT industries. The continuing deregulation of the electricity industry is also reducing electricity prices thus lowering the underlying costs associated with Internet and other operations. Costs per kilowatt hour have fallen from 15 pfennigs in March 1998 to 11 pfennigs in May 2000 for industrial users.45

79. While the infrastructure is present, usage is relatively low in Germany—though the Internet is taking hold very quickly. Internet hosts per 1000 inhabitants as of July 1999 showed Germany low on the list—below the EU average of around 30 hosts per 1,000 inhabitants.46 On this dimension, both France and Japan ranked just below Germany. The highest number of Internet hosts per capita reside in Finland, the United States, Iceland, and Sweden. As of 1998, on-line subscribers and Internet usage are also relatively low, in part due to the low computer ownership among the general population. More recent data, however, shows the number in Internet users in Germany doubled within the six months ending in January 2000 along with the increasing use of mobile telephones and televisions, instead of computers, as the connection devices to the Internet. Small and medium-sized businesses (consisting of nearly 80 percent of Germany’s business sector) are already avid users—Internet access is present in 94 percent of all companies with between 10 and 500 employees and one in every six of these firms is engaged in e-business.

80. Until very recently, European firm’s use of equity finance, one of the main methods of financing the “new economy,” has been relatively limited as compared to the United States and the United Kingdom. Equity issues—both publicly-issued equity and privately-issued equity (venture capital) represent the primary means of financing for IT companies.47 One reason equity is a “natural” vehicle for financing these types of startups is that they typically have no ongoing cash flows. Thus, bank financing, which requires evidence of cash flows for interest payments is unsuited to these enterprises. Equity capitalization as a percent of GDP is much lower in the euro area than in the United States—71 percent for the euro area and 163.3 percent for the United States. In terms of the high-tech firms as characterized by the NASDAQ index in the United States versus the Neuer Markt index in Germany the numbers of even more striking. The market capitalization of the NASDAQ is about 22 times greater than the Neuer Markt and about 17 times as many firms are listed on the NASDAQ as on the Neuer Markt. The strict rules governing new listings on the Neuer Markt may, however, be a blessing since the most recent set of initial public offerings (IPOs) in the United States, particularly those associated with the dot.coms have met significant difficulties.

81. Despite the overall reticence to use equity, technology investments made through venture capital in Europe have exploded, albeit from a low base.48 Using the most recent data available, growth between 1997 and 1998 amounted to a whopping 75 percent, reaching ECU 4 billion. By comparison, similar investments in the United States in 1998 reached ECU 9.4 billion—more than double. Of the seventeen countries included in the PriceWaterhouse-Coopers 1998 survey, the United Kingdom led technology investments with 44 percent of the total amount invested; followed by, in order, Germany, France, and the Netherlands. Germany, however, led in terms of number of investments at 711, with the United Kingdom and France following.

F. Policy Issues for the “New Economy” in Germany

82. The picture of the “new economy” obtained from the evidence presented above suggests that Germany is not at the head of the pack in terms of production of IT goods and services, but is well placed to be a significant user. Germany’s use of technology in its manufacturing sector is almost legendary. It’s “consensus model” for technological adoption—the introduction of industry standards before widespread use—and its incremental approach mean that there may be a time lag before new technologies are fully operational. Once standards are in place, however, adoption tends to be very rapid. The Federal Ministry of Economics and Technology have a number of initiatives under way to quicken the pace of IT adoption, including the formulation of standards in some areas (e.g. electronic signatures). In other areas, the Ministry is attempted to dispense with standards or rules that may no longer by applicable (e.g. abolition of controls on cryptographic production).

83. While the formal connection between the productivity gains from IT investment and labor and product market structures is not yet well developed, many commentators and economists believe labor and product market flexibility to be key. Recent research shows that countries with the lightest degree of regulation in the economy (as measured by administrative regulation, product market regulation, and employment protection regulation) were able to generate the fastest growth rates of total factor productivity.49 Moreover, the free flow of financial capital to new entrepreneurs also appears to be important. The discussion below highlights some areas that may require special attention in light of the features of the German economy.

Labor markets

84. Though formal evidence is slim, a flexible labor market is put forth as a key element that permits the rapid accommodation of information technology into the economy and aids productivity growth. Flexibility encompasses a number of features: high levels of job turnover (the ability to hire and fire with a minimum number of constraints), flexible hours, retraining opportunities, wage differentiation, and non-wage compensation that is transferable or fungible (e.g. transferable private pensions, stock options).50 Germany is viewed as having higher costs of displacing workers than many other countries and this type of feature may delay some of the benefits of the “new economy.”

85. Encouraging part-time employment and flexible working hours, perhaps by permitting more flexible shop opening hours may be helpful. Features found attractive by the IT workforce appear to include the ability to work part-time, particularly for women, and the ability to work at home or in other locations. Flexible work arrangements are probably most likely to arise in sectors that use computer and communications equipment, rather than in the production of the equipment. Many of these jobs are already outside the more highly regulated sectors (the “crafts”) aiding their development further. Specifically, an examination of social insurance contributions with a view to lower non-wage costs that discourage flexible work arrangements may increase the number of IT workers.

86. The German apprenticeship program could be better utilized to target information and communications technological jobs through a variety of methods. The application of the same structures and principles underlying the apprenticeship program to retraining older workers through a “lifelong learning” project, rather those just graduating from secondary schools, could help make a dent in the structurally unemployed. Early attempts at increasing the flexibility of “lifelong learning” programs are already underway. Educational practices at the university level could be enhanced with collaborative industry-university programs to increase the supply of “IT-enabled” workers. In fact, even among the “IT-enabled” workforce maintaining up-to-date skills is already a necessity, not a luxury. Though, it will be important to assure that a “digital divide” between IT-enabled individuals and others does not alienate any given socio-economic group.

Product markets

87. Deregulation of the telecommunications markets in Germany has contributed to the development of ICT sectors and the diffusion of the Internet, which depends critically on cost of telephone usage. Costs of long distance calls have fallen dramatically and costs of mobile phone service saw a decline of 20.5 percent last year. Despite the dramatic fall in telephone costs, the relative cost of Internet access remains higher in Germany than the OECD average though it is lower than half of the other European countries.51 Given the increased demand for a range of communications services (e.g. longer calls, second residential lines, higher-speed, high-quality services, and leased lines) associated with use of the Internet, continued deregulation and the ability for industrial restructuring will remain top priorities.

88. In some of the ICT sectors, economies of scale are present and therefore mergers and acquisitions in these sectors may be efficiency enhancing, but careful attention to possible market abuses is still necessary.52 It is perhaps telling that telecommunications sector experienced the largest value (over $250 billion) of mergers and acquisitions (M&A) in Europe and North American in 1998 in comparison to the software, hardware, and support services sectors (all less than $100 billion)—the largest gains from economies of scale are arguably most obvious in this sector. Germany, however, did not share proportionately in this M&A activity, considering the size of its telecommunications firms. While it is impossible to attribute the lower number of M&As in Germany to any specific cause, it is well-known that German industrial restructuring (e.g., through the ability for hostile takeovers) has been somewhat inhibited. The authorities plan to establish a clearer legal framework for corporate takeovers to help alleviate these concerns. However, competition authorities should remain cognizant that even firms in industries that are not obviously “natural” monopolies now (or used to be), may be able to constrain the entry of competitors so as to obtain monopoly-like advantages as a recent legal case in the United States illustrates. Thus, more leeway for M&A activity will probably allow Germany to reap more of the benefits of the “new economy” as long as such side-effects are limited.

89. The administration burden placed on young companies also discourages startups. There are already plans to reduce and simplify regulations—the Federal Ministry of Economics and Technology’s “initiative to cut red tape.” While most high-tech workers are not covered by the Craft Code, which puts restrictions on the training and expertise within various master-crafts professions, mere are still requirements in the area of “liberal” professions that could usefully be re-evaluated.

Financial markets

90. The current bias toward retained profits may have the inadvertent side-effect of restricting the amount of venture capital that would otherwise be available to finance “new economy” start-up enterprises. In addition to the different effective tax rates levied on the distributed profits obtained within different corporate forms, there is a general view in Germany that the tax system should help to avoid “short-termism” in investment decisions and limit the possible role of stock speculators. However, the tax bias toward retained earnings (a “lock-in” effect) restricts the use of capital and makes outside equity financing relatively more expensive by lowering the “internal cost of capital,” the reinvestment rate from retaining earnings.53 Part of the motivation of “new economy” venture capitalists is to provide the seed money for an investment project and then realize the gains within the project horizon. The cash payouts from one project, in turn, provide the financing for other projects in other firms. Although not all venture capital-financed projects have positive outcomes, the venture capitalist typically diversifies across firms with different products and time horizons—a feature made possible by the free flow of distributed profits.

91. Removing any impediments to the use of private equity and venture capital and encouraging its use in technology investments would probably make Germany a more attractive location for “new economy” startup enterprises. While the total amount of private equity and venture capital raised in Europe in 1998 was a record ECU 20.3 billion, comparatively less of this money was planned for technology investments than in the United States. While directly comparable data are not available in the survey, in the United States, about three-quarters of total venture capital investment was invested in the technology sectors. In Germany, the planned investment in the technology sector was 35 percent. Several plans are underway in Germany to enhance its reputation in this area—Deutsche Ausgleichsbank’s new “Startgeld” (start-up money) is an example.

G. Conclusion

92. Macroeconomic evidence that the “new economy” has arrived in Germany is not yet forthcoming: however, other microeconomic-based information suggests Germany may be on the brink of its arrival. For example, recent recalculations by the Bundesbank regarding the real level of IT investment put Germany much closer to the experience in the United States. Much of the uncertainty regarding the presence of the “new economy” may therefore be the result of differing methodologies for computing the statistics typically used in macroeconomic growth accounting frameworks. However to maximize the potential win all to productivity and output growth some improvements to the functioning of labor, product, and financial markets could be considered. A number of policy changes are already underway, but additional reforms may be needed to fully reap the benefits of the “new economy.”


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  • Deutsche Bundesbank, 2000, “The International and European Setting,” Monthly Report, August.

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  • German Federal Ministry of Economics and Technology, 2000, “Economic Report 2000” (Berlin, Germany).

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Prepared by Laura Kodres with contributions from Marcello Estevão and Joaquim Levy.


Skill-based wage differentials have ceased widening and employment gains have been relatively broad-based.


See SM/00/146, United States—Selected Issues and Statistical Appendix, Chapter I, for several definitions of the “new economy” and a discussion of this debate and EBS/00/156, the World Economic Outlook, Chapter II, for additional cross-country information.


See the Selected Issues for the French 2000 Article IV consultation, Chapter III, for a more detailed discussion of France.


It is important to recognize that Gordon’s results depend crucially on his technique to split trend and cyclical labor productivity growth.


Sweden is an exception. See also above referenced Selected Issues chapter for the French Article IV consultation for an initial attempt at a decomposition of labor productivity along the lines of Sichel and Oliner (2000).


See Table 1 of Schreyer (2000).


The OECD, for instance, recommends that no productivity calculations using business sectors be made due to the rebasing and redefinitions of SNA93 accounts. Thus the numbers in Table III-2 should be viewed cautiously.


The industries utilized in these data include (1) office and computing equipment, (2) radio, TV and communications equipment and (3) communications services.


See the “Innovation and Jobs in the Information Society of the 21st Century: Action Programme by the German Government,” Federal Ministry of Economics and Technology.


See P. Welfens and A. Junmittag, “Effects of an Internet Flat Rate on Growth and Employment in Germany,” European Institute for International Economic Relations (EIIW), February 2000.


See the “Economic Report 2000,” German Federal Ministry of Economics and Technology, p. 38.


See the “OECD Information Technology Outlook, 2000,” Chapter 1, Table 14.


See the “Economic Report 2000,” German Federal Ministry of Economics and Technology, p. 44.


See the “Economic Report 2000,” German Federal Ministry of Economics and Technology, p. 48.


Hosts represent websites established with a domain address within a specific country (e.g. for Germany, the domain address is “.de”) rather than the number of subscribers to Internet services.


In the accompanying data, private equity included venture capital, replacement capital and buy-outs. Venture capital includes seed, start-up, other early stage, expansion, bridge finance, and rescue/turnaround. “Money for Growth: The European Technology Investment Report, 1998,” PriceWaterhouseCoopers.


Technology based companies were defined in these data as communications, computer related, other electronics related, biotechnology, and medical/health related.


Flexibility can also have negatives. High turnover increases frictional unemployment. Those with low education levels and low innate ability may have difficulty retraining, leading them to remain either unemployed or to take unskilled jobs at the bottom of the pay scale. In fact, the increase in income inequality in the United States is cited as the outcome of these negative attributes to flexibility.


This fact, though, is not entirely dependent on the on-line cost of a telephone call but, as well, the fees levied by Internet service providers.


In fact, the “natural monopoly” formed by declining marginal and average cost over a large range of output is what led to regulation of the telecommunications industry initially. With the advent of wire-less technologies, the ownership of lines (and who uses them) has made this industry “contestable” and thus the rationale for regulatory intervention has lessened.


See Selected Issues, Chapter IV, “Tax Reform in Germany” for a further discussion of new equity financing versus retained earnings.

Germany: Selected Issues
Author: International Monetary Fund