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Prosperity through knowledge: Germany needs fresh impetus

Labour and capital, once Germany’s primary drivers of growth, no longer ensure the country’s economic might. In the years ahead it will take technology and knowledge to create prosperity, as technological innovation becomes the sole engine of growth. New business models will be created but risks will also emerge that threaten social solidarity. Germany urgently needs to lay the groundwork for this change or else fall behind the other major economic powers in terms of growth.

The country has had strong years, both economically and structurally. And yet many people in Germany are concerned about the country’s political and economic future in the medium term. Addressing these important questions should not be put off. For while the county is doing well today, troubling trends are observable which call Germany’s position into question over the longer term. Over the next half century, Germany could conceivably slip to last place among the world’s major economies in terms of growth. 

Demographic change will reduce the growth contributions of labour and capital over the next few decades to a low level, possibly even into negative territory. Germany will have to rely on technology and knowledge to create prosperity in the fifteen years ahead, for technological innovation will become the sole engine of growth. Yet this consideration figures little into the current political discourse in Germany.

A wave of major structural reforms will likely be seen by 2030. The years in between can be utilised to lay the foundation for modern economic activity. Germany will have to open up some of its industry-related services in particular to further competition and make them more efficient.

Huge opportunities, serious concerns

Germany is set to continue to evolve into an industrial knowledge society. The country’s economy will be characterised by modern services, new industrial value added and a rapid pace of innovation. This opens up huge economic opportunities, but it requires modern industrial policy heavily focused on education, research and technological innovation. Germany must lay the groundwork for such change. The consequences for economic policy have not yet been considered in all areas.

The signs of change evident in global politics, in technology and in society are so clear that many are worried about the future of labour and about social solidarity, the environment and prosperity. In future, classic industrialised countries like Germany will play a significantly smaller role in global economic growth. The OECD projects that China and India will increase most in economic significance through the year 2030 and that Africa will grow considerably by the year 2060.

To enhance growth potential it not only takes a larger labour supply, it also requires workers with more skills as well as more gross fixed capital formation and higher productivity. Investment and innovation in business and society can make Germany more productive.

Overall, the level of investment across the entire economy has been low since the unification boom ended in the mid-1990s. Despite a favourable employment trend over the last decade, fixed assets are ageing in many manufacturing industries and in public infrastructure.

A more vibrant culture of innovation is needed

Germany must engage more in very long-term decision-making on industrial policy than it has in the past. The country still enjoys several great distinguishing features as a business location. But weaknesses in the areas of start-ups, venture capital, public-sector investment and creating a regulatory framework for certain key technologies must now be addressed with a sharp focus.

A more vibrant culture of innovation is needed. In future, productivity will depend on knowledge and the intelligence that we use to combine labour, capital and knowledge. Dramatic declines in marginal costs will enable radical technological change, which will lead to entirely new business models. This will change value added in major sectors such as mobility, healthcare and energy, increasingly pairing them with services and making them highly knowledge-intensive.

Asian countries will be taking advantage of the opportunities opening up. China has recently seen a rapid rise in knowledge-intensive value added. In many fields, South Korea is the leader in entrepreneurial realisation of new products and services.

Today’s market leaders are generating large profits with business models that are scalable worldwide. But yesterday’s market leaders may have already missed out on the latest trends today and wake up to find other temporary oligopolists in charge in three years. New responses are required to shortages of energy and raw materials as well as to a giant leap in innovation by mobility providers, necessitating infrastructure adaptation. Responses are required as well to rapid advances in medicine that are changing the lives of billions of people. And at the same time, international security problems have returned as a major concern.

Potential of the European Union underestimated

Over the medium term, German enterprises and entrepreneurs will probably have to make up for deficits accruing to the country as a business location by collaborating with European partners and continuing to operate worldwide. Germany must become more deeply integrated in Europe and improve the conditions for creating economic value through international cooperation. While bilateral and multilateral trade policy have become more difficult, the European Union has grossly underestimated potential for creating shared opportunities.

Europe is capable of acting as a more unified political force than any other major region in the world. Despite differences in demography, culture, language, economic geography and policy, a governing structure can be created that is politically attractive, economically and socially successful and committed to peace in foreign policy. In contrast, Asia is now where Europe was at the start of the 1950s, with limited systems of balance-of-payments assistance and freer trade, having taken its first steps towards liberalisation and having established its first public investment banks.

The internationalisation of “Made in Germany” is the success story of German business, and it is poorly understood. We have experienced a decade of extremely dynamic and surprisingly steady international expansion by German industry, which took advantage of market opportunities in the new German states. Yet Germany’s manufacturing growth and innovative strength cannot be maintained without technological leadership. There are considerable opportunities in a number of technological areas, and they must be decisively exploited.

Social acceptance lacking

It is problematic that society has little awareness of the sources of prosperity. Some industries struggle with social acceptance problems, leaving important questions open for the foreseeable future about much of the business activity in Germany, particularly in view of economic internationalisation. The broad consensus is crumbling which has been in place for the last half century regarding the necessity of having a healthy balance between global market integration and welfare state policy, i.e. the consensus on the social market economy, and there is increasing unease about the world. Productivity and social cohesion need to be well balanced in a digital world as well. Sound policy will be crucial to ensure that efforts to realise such balance are ultimately successful.