The Pathological Export Boom and the Bazaar Effect: How to Solve the German Puzzle

Germany is the world champion in merchandise exports and yet the country suffers from mass unemployment and stagnation. Hans-Werner Sinn’s paper ‘The pathological Export Boom and the Bazaar Effect’ appearing in The World Economy journal this month, tries to solve this puzzle.

Professor Sinn argues that although globalization has reduced equilibrium wages in Germany, actual wages have refused to budge. This has caused a massive structural change away from the labour-intensive import-competing sectors towards the capital-intensive export sectors, with the result that high value added in exports comes at the expense of jobs and aggregate value added, when all sectors are taken together.

While this structural change goes in the right direction, it is excessive: Germany generates too much value added in the export sector. As this excessive specialisation also goes from upstream to downstream activities, Germany has turned into a kind of bazaar economy that imports an ever-larger fraction of its exports. Thus not only value added in exports is too large, but export quantities relative to value added earned in exports are equally too large. For these two reasons, Germany is experiencing an export boom that comes at the expense of an over-proportional decline in its labour-intensive internal sectors and leads to increasing unemployment.

This explanation of the puzzle makes evident that Germany needs fundamental reforms to make its labour market more flexible, including a curtailing of union power and reforms in the direction of an activating welfare state.