Appendix Indicator of Structural Reforms
145. To quantify the forces that influence reforms in Germany, an indicator of structural reform was constructed as a first attempt that can be refined over time. The sources are the chronologies of economic policy in annual reports of the Bundesbank, the Sachverstandigenrat, Heilemann and others. (2003), and Steffen (2000). Laws and decrees that affect primarily the supply side of the economy are considered structural reforms. This sets them apart from changes, e.g., in interest rates and public spending that target the demand side. To quantify the scope of a reform, each measure is given a value from 1 to 4, where a higher number means a more wide-ranging reform. Finally, all reforms are classified as to whether they expand the role of the state (positive sign) or expand the role of markets (negative sign).
146. Table IV-1 shows a comprehensive list of structural reform measures from 1970 to 2004. The list is visualized in the figures below, which show the changes and the level of the reform indicator, respectively. While the 1970s experienced the last major expansion of the welfare state, the tide began to turn in the early 1980s. Since then, reforms mostly focused deregulating markets, privatizing and more generally reducing the role of the state. However, this trend was not uniform, and structural reforms became more erratic in the mid-1990s.
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Prepared by Jörg Decressin and Benedikt Braumann.
A key objective is to combat “fiscal illusion.” See Friedman (1962) for a fuller development of this argument in the context of monetary policy rules.
The interpretation of the “same living standards” wording is subject to considerable debate (see para. 143).
The exact distinction between laws that require approval of both chambers and those that do not is subject to some debate in Germany and a Bund-Länder commission is investigating the matter.
Parties need to have either three direct seats or 5 percent of the votes cast to be represented as a parliamentary group.
They may do so either systematically or only ahead of key elections, giving rise to political business cycles (Alesina, Cohen, and Roubini, 1992 and 1993).
During the 1970s and 1980s, Länder with a coastal line (e.g., Bremen, Niedersachsen, Schleswig-Holstein) and smokestack industries (e.g., Saarland) struggled with structural change. The challenges raised by reunification are considerably larger. Throughout the postwar history the interests of city states, for obvious reasons, differed from those of the other Länder.
By and large, governments in Germany have been fairly centrist. The use of the terms “left leaning” and “right leaning” in this paper therefore is simply convenient shorthand for denoting relative tendencies at the margin rather than an absolute judgement.
In contrast, strong (united) governments have been able to cut expenditures (1980s and 2000), or to raise taxes (1970s)—see Figure IV-5.
The latter comprises five professors, appointed by the government to the council, who draft an independent, annual assessment of the German economy, which is released in November.
See Chapter IV of IMF Staff Country Report 021240, and Chapter III in this volume.
Compliance with the golden rule could still be monitored with such data, with public investment defined accordingly. For the general government this would have revealed frequent violations of the golden rule during the 1990s (Table IV-2).
Preliminary data through 2003 suggest that the Bund missed its expenditure target, largely because of the Bund’s contributions to the social security system, while the Länder achieved it. The deficits targets of the Bund and Länder (combined) were appreciably overshot.
Similar suggestions have been made by a commission of experts, appointed by the Ministry of Finance.
Even upon fully considering municipal revenue, some calculations suggest that each Land reaches at least 89.5 percent of average per capita revenue; under the new, 2005 system the figure will be 91.2 percent (Lenk, 2003). Matters differ somewhat for the city states because of the population weights.
Providing such incentives with tax rates might be more effective than doing so with subsidies.
The Länder can vary the Gewerbesteuer (local business tax) but its tax base likely is fairly mobile, unlike the tax base of personal income tax rates, for example.
Public sector employees in the new Länder receive a lower wage than those in the old Länder although the difference is set to be phased out.
This is not to deny that government transfers to the new Länder likely have been helpful in fostering their rapid catch-up during the first half of the 1990s.