Germany and Sweden as Cmes

To what extent would you regard Germany and Sweden as coordinated market economies? 1. Introduction In an era where internationalism is contemporary, it has become crucial for countries to liberalize markets and renovate traditional structures. This is particularly important for countries whose social values and economic relationships are based on public coordination. This essay is going to explore the degree to which we consider Germany and Sweden as modern coordinated market economies, and the changes brought about in recent decades.To assess the changes we shall look at trends in trade union and employers’ association participations, collective bargaining reforms, training systems amendments, renewals in corporate governance and fluctuations of wage inequality; first by uncovering the basics in each element and then evaluating their stability in relation to globalization. 1. 1 What is a coordinated market economy (CME)?Being one of the wings of capitalism in which industria l relations and economic conditions are measured, as Bamber, Lansbury and Wailes (2011) state, CMEs can be used as â€Å"an approach for comparing†¦different countries, [with this comparison, it allows us] the understanding of convergence and/or divergence† between different economies. And in each of the key elements we mentioned, companies in CMEs resolve problems through relational, non-market based strategies and the outcome will be strongly dependent upon co-operation with supporting institutions. . 1 Past dominance of trade unions and employers’ associations A key feature of a CME is the dominance of employers’ association and trade unions within the country’s industrial relations; both Germany and Sweden have had a high degree of centralization during the 1980s. Trade unions were a powerful, acting as representative for labour in large corporations and also intermediaries of employment between labour and employers.A common characteristic is tha t the labour unions in the two countries manage institutions for all labour participation; Hancke (1996) states that in Germany, three quarters â€Å"of the members of works councils are union members and they coordinate actions with the labour union sections (Vertrauensleute). In Sweden, local â€Å"shopfloor clubs† (Verkstadsklubben) not only negotiate company agreements with the firm†¦[but also] recruit every newly arrived worker†.On the other hand, employers’ associations were also well-managed in both countries for a long post-war period; German industry federations are able to authorize private firms that are even no longer part of central arrangements on cases involved in collective bargaining, employee training and other social policies. In Sweden, Kurzer (1993) finds, â€Å"large companies in the export sector are part of financial conglomerates holding, which allows for high coordination capacities amongst large firms†. 2. 2 Recent trends i n membershipsHowever, both countries have become less concentrated in the recent decades as both have experienced less union and association densities for the massive individualization of enterprises and the falling popularity of collective agreements – now with the society seeing less value of group negotiations, which makes the industrial relations less compact compared to before. In Germany, both employers’ associations and trade unions have been experiencing a slump in the number of members since late 1990s.This is particularly evident in industries from Eastern Germany, where many organisations have resigned or become reluctant to join associations and took preference in company level negotiations. Shroeder and Silvia (2007) use the Metals Industry Employers’ Association to exemplify that employment density in Eastern Germany has fallen more severely than Western Germany. We can notice from the diagram below that since 1992, the percentage of Eastern associ ation density has decreased dramatically from over 65%, down to less than 25% in a decade.After the German unification, union members have clearly declined, Eurofound (2009) shows that â€Å"from 1991 to 1998, German Trade Unions lost almost 3. 5 million members†. The majority of these resignations were found to be eastern German labour, Eurofound states, â€Å"leaving the unions because of unemployment and disillusion with the western-type unionism†. Data from the Organisation for Economic Co-operation and Development (OECD, 2013) further shows the downward sloping of German Trade Unionists density since 1999; from 25. 3% it has dismounted to 18. 8% in 2009.The main cause for this trend is due to the loss of traditional dominant union memberships in manufacturing industries and public sectors, worsened by issues in persuading younger generation in the expanding service industries within private sector. Hence, the value of collective agreements has been called into que stion as it is becoming extremely difficult to positively coordinate the relations between employers’ associations and trade unions. This is predominant in â€Å"a growing number of private services industries†, Eurofound informs, where â€Å"concluding collective agreements at all has shown to be increasingly difficult or not realizable†.Unlike Germany, Sweden on the other hand has dealt with much higher historical density in trade union members which suffered recent decline but continuously concentrated employers’ associations; the decrease in trade unionists is spread evenly between white-collar and blue-collar workers, men and women, and more problematic amongst the younger working generation who have less regard for unions – a drop in the private sector from 78% in 1993 to 65% in 2009 as shown in the table above; â€Å"the decrease in membership is mainly due to the government’s amendments of the fees to the unemployment benefits in Ja nuary 2007†, presented by Kjellberg (2007); the main objective to significantly amending the funds was to â€Å"to persuade unions with high fund fees to be more moderate in wage negotiations†. As for employers’ associations, unlike trade unions, its density has been rather stable over the years, with only 2% drop from 1995, private sector labour in 2009 has still got over 75% density in employers’ associations.Therefore, when compared to Germany, Sweden has a higher degree of coordination in balancing the density of the two sides of its industrial relations over the years, and has remained rather stable; if not long-term then this rather forecasts the near future of these two economies – the summary being Germany becoming more market-oriented with less collective participation of its social partners, whereas the Swedish economy is more likely to maintain a coordinated market in this sense. 2. 3 Decentralization of collective bargaining In this sect ion we will discover that the industrial relations within both countries are becoming more decentralized in the second half of 21st century as the level of collective bargaining decreases, and therefore moving further away from a coordinated market system;The initiation of Germany’s decentralization has actually long been observed by researchers since early post-war periods. Many have argued that the main outcome of this renewal was to avoid the rise of another â€Å"centralized super-state†, says Johnson (1973). In hope this will bring separated powers of legislation, politics and administration between the government, the federated states and the local authorities, to produce the ideal, ‘good government’. Following such perception, the German economy has been made key amendments in its industrial relations policies – extending its collective bargaining with opening clauses into agreements within sectoral level, making terms more flexible and less controversial.This has been seen as an improvement to prevent organisations from completely abandoning the usage of collective conditions. Such clauses were put into four categories listed by Schnabel (1998): 1) Hardship Clauses; enabling companies to be exempted from certain industry-level bargaining when facing bankruptcy and show signs of making viable strategies for future. 2) Clauses with Veto Rights; these give social partners such as managers and works council to negotiate particular agreements related to individual firms. 3) Clauses without Veto Rights; unlike the previous category, these clauses empower plant-level social partners to terminate collective terms that show signs of irrelevance with industry-level agreements. ) Small Enterprise Clauses; giving special treatment to small companies facing economic downturn by allowing them to set wages below the minimum level which was collectively agreed upon. In terms of the distribution of such opening clauses, the IAB Institu te for Employment Research (2005) shows that more than  Ã¢â‚¬Å"13% of the companies surveyed in both eastern and western Germany that are covered by collective bargaining confirmed that opening clauses exist in their collective agreements. Of these establishments, 52% made use of opening clauses in 2005†. However, even with such adjustments in the system, the use of opening clauses will rely heavily on the economic situation of the specific organisation. When the figures are favorable, then such clauses will be implemented less often.Compared to its neighbouring countries, Sweden has showed early signs of decentralization beginning late 1980s with government sharing more responsibilities with local administration; the most symbolic being the release of ‘free communes’, as mentioned by De Vries (2000), a system â€Å"in which a limited number of communes and counties were allowed to apply for dispensation of state laws, rules and regulations†. Together wit h the downsized central government, closer attention was then paid to market forces and began the establishment of â€Å"hollow states†. One of the nationwide movements was the erosion of collective bargaining within the past two decades, as social partners have become more willing to pass on the negotiation on wages and working hours to local level. For instance, certain terms on wages are left intentionally ambiguous to let the local level authority take charge and decide on the specific figures on final rates and figures.However, there still remains a high degree of controversy as employers harshly pursue a improvements in the bargaining system while attempting to take payment agreements to local levels – making to extremes in manual industries such as negotiating wages individually; the state is facing difficulties to respond to these demands, because from the perspective of economists, it is most ideal to be either highly centralized or as it was before, greatly d ecentralized, not somewhere in between. When making decisions, as debated by Eurofound (2009), parties at national level will consider the economy as a whole and correspond with a collective responsibility, whereas with enterprise leveled agreements, only individual firms’ stakes are considered – but when placed in the middle, parties often lose the acuteness in authority.The national coverage of collective terms remains a high figure in recent period; reported by Eurofound (2009), as much as 92% in 2001 and 91% in 2007 – however, such coverage figures is extremely misleading in this case with the decreasing rate of unionists and employers associations in Swenden – that is, although remaining high above EU average and constantly used as an indicator to measure the strength of bargaining powers and the extent of benefits received by social partners, less of them are actually being bounded by collective agreements in recent years, making the coverage less e ffective. 2. 4 Transforming education and training One of the most noticeable features of a CME is its highly proficient education and training system; the purpose is to have an extremely skilled labour force with skills specific to the industry or enterprise in which they are employed in. Culpepper (2001) states that in order for companies to coordinate employee capabilities and for workers to receive beneficial employment, there are various ways how a CME manages its training systems;In Germany, the responsibility of training and education is shared amongst firms and public authorities, â€Å"organized on a co-operative, tripartite basis†, referred by Hoffmann (2004); the German â€Å"Dual-system†, is acknowledged as world’s leading model for high-quality training, business practices and theoretical learning. The foundation of the dual-system is built by altering training in vocational schools and private firms, â€Å"while in-firm training is regulated natio nally, the vocational school instruction programs are the responsibility of the Lander (states)†, Trembaly and Le Bot (2003) mention. However, the durability of this system has been at the centre of debate ever since the elimination of the nation’s Training and Apprenticeship Law back in 1969.The model faces numerous challenges in meeting demand from rapid changes brought about by modern production systems; it is essential to keep a large working population to sustain its framework, but becoming problematic as currently Germany is having an ageing population, thus harder to recruit as many apprentices as forty years ago. As the occupational structure is dependent on collective agreement, when lacking skillful labour, Masden (1990) worries that if in such â€Å" difficult labour market situation, some firms [do not comply to regulations by] increasing wages to attract apprentices or, alternatively, poaching apprentices trained in other firms, then the whole system may p rogressively be brought into question†.The focus of this system also faces a huge dilemma between the increasing demand for theoretical learning amongst younger workers and the higher standard of skills wanted within productive systems, Gehin and Mehaut (1994) discuss it is potentially challenging the logics of the whole system while creating stocks of unskilled workers out of the job market. Additionally, issue is raised for the outpaced training speed against technical changes in the modern production system, especially for key requirements in multi-tasked occupations and practical de-compartmentalization. Kern and Schumann (1989) suggest that this trend of demand for â€Å"theoretical, general and vocational training are increasing and will continue to do so†. Therefore, if the dual-system were to be sustained, serious adjustments would have to be made to comply with modern requirements.Since the 1940s, new forms of vocational training have taken shape in Swedish org anizations, where the majority was still conducted by public institutes. This has started to shift, however, in the final quarter of the century, where responsibility began to move to local authorities from the central government. Following this trend of decentralization, the manufacturing industry in particular, has taken chance to put large investments into different training programmes to enhance productivity. But serious questions has been raised as trainees in the manufacturing sector face challenges â€Å"with the increased amount of theoretical education†¦as firms’ demand for workers with better theoretical knowledge† began to soar at the same time, Lundahl and Sander (1998) mention.With this given circumstance in Sweden, four models of education and training are used to demonstrate the degree to which coordination is deteriorating and decentralization has taken place; firstly, we have to acknowledge that the demand for labour competence has changed vastly with the increasing demand of formal education amongst new workforce and the general rise of demand for new products and practices in organisations. Within the industrial programme, the most controversial of all models, as Lundalh and Sander (1998) describe, a system in which inhibits a distinctive characteristic of â€Å"education in workshops† (arbetsforlagd utbildning); although very intensive and effective, it requires a large amount of time in workshops and includes theory as well as practical exercises. Many firms are reluctant to take initiatives as they argue that not enough human capital or time can be allocated to give proper training to each group of trainees.Continuously debated by researchers, such as Olofsson (1997), is the relevant application of the apprenticeship system onto modern organisations as its value has been rethought alongside secondary education, now deserted in most large cities, remaining exclusive to areas such as Svedala. The third model, Firmà ¢â‚¬â„¢s Schooling, is a highly demanding system that require 50% more time input and only submits students with outstanding performance, applied only in large enterprises such as Volvo or Scania where intensive training is seen as obligatory to match international competition. Lastly, Technical Programmes is widely accepted by municipalities with provisions of extra vocational studies, and also organizations can be more involved in supervision. It is a co-operation between groups of firms in terms of common facilities and cost-sharing, and has become more popular after producing impressive recruitment effects.According to Trembaly and Le Bot (2003), several amendments were proposed to reform the German system following the listed principles; â€Å"1) modernization of regulation, 2) inclusion of new occupational fields, 3) mutual recognition of the various parts of the system and 4) differentiation of training†. Hence, in order to adapt to evolving market demands, the German training system still is, and needs to be coordinated by public authority to a great extent to aid the private sector in improving employability, incorporating occupations and general training. As for Sweden, the transition of training responsibility onto individual organizations from local authority is due to its failure to provide emerging labour with desired competence.At the present, different methods are implemented by firms that deliver contrasting quality levels in training programmes; this is hugely differentiated from traditional forms of Swedish vocational training. The four models all demonstrate a degree of success but act more as a forecast of future vocational practices in Sweden – the extinction of conventional industrial programmes, further proving the liberation of Swedish economy from central coordination. 2. 5 New models for Corporate Governance In terms of corporate governance, a CME is established through the solid relationships between its financial inst itutions and private organizations. In this section we shall look specifically at the role of public financial institutions and other external stakeholders on the corporate operations of organizationsIn Germany, there was definitely a strong coordination of economic exchanges between industrial companies and institutions by means of cross-shareholding, supported by many scholars and again proves Hall’s relational view of CMEs; such â€Å"close relationships and interlocking between board members of different companies† and financial institutions such as banks and insurance companies, Hopt and Prigge (1998) also support, which composite the country’s main characteristics of corporate governance, together with heavy reliance on personal connections. It is essential to discover the features of the German model before discussing the reforms in recent years; there is a universal banking system that permits banks to possess equity shares in industrial organisations â €“ allowing banks to alter company’s decisions. Porter (1992) refers this as the â€Å"shareholder direction† situation since more the equity share, the larger the influence. This relationship between banks and firms is long-term and fairly stable because as well as equity, the banks also provide a large share of debt and carries operational management in the firms’ finance, this strongly protects companies from being taken over.To get further involved with company decisions banks are able to release proxy votes, as clarified by Onetti and Pisoni (2009), â€Å"this is done in relation to votes related to direct equity shares, [for instance by exercising] the voting rights for the shares that retail customers deposit with them†. Consequently, this gives more authority to banks in public firms. Since the German model is heavily influenced by banks, the stock market has therefore a small role to bear in corporate governance, proved by the IMF World Econo mic Outlook (2007) the fact that during 1990 to 2005, the capitalization as a percentage of GDP in Germany was only 38%, compared to 132% in UK, a much more liberal market economy.Since the shareholding in Germany is usually long-term with companies, there is a reciprocal of equity connections between firms themselves and firms and banks, creating a system of cross-sharing. Despite its robust features mentioned, the Germany corporate governance system is bending due to socio-economic changes brought about internally and externally; the globalization of Germany markets, enabling the listing of top companies on international stock exchanges, such as Daimler being traded on the New York Stock Exchange. There is a substantial increase in the amount of foreign investment in domestic industries, referred to by Jurgens et al. (2000) as the â€Å"turning point in the transformation of the German system of corporate governance.Due to recent economic recessions that caused a wave of bankrupt cies in German markets, banks have started to reduce the amount of their corporate equity in shareholding as more value is discovered in freer financial markets, stated by Jurgens and Rupp (2002), and began to focus more on economic performance; this in turn gave more freedom to the financial market legalizing numerous new financial choices for companies. On the other side, Swedish corporate governance consists of a great division of ownership from control by means of â€Å"pyramids, dual class shares, and cross-holding [that] increases the potential for private benefits of control†, cited by Holmen and Knopf (2004).The basic structures are formed by two types of partnerships; first, it is between entrepreneurs and rich families, then there is the alliance between engineers and technology innovators. Sometimes Sweden is described as an extreme version of â€Å"Rhineland model†, as Habbard (2008) stresses, it contains corporations that are owned by big industrial groups , â€Å"privileging organic growth† and features of a typical CME. Taking a closer look at the Swedish model of ownership we notice that the power is usually held by one to two owners, who are most of the time wealthy families. Henrekson and Jakobsson (2003) conclude that â€Å"regarding controlling ownership, the Swedish ownership model thus resembles the predominant corporate governance model on the European continent†.The rigidity and concentration of this structure has been based on a few important Swedish families and banks, Habbarb (2008) continues; Wallenberg, Lundberg, Stenbeck, Klingspor, Von Horn families and Svenska Handelsbanken SHB, Skandinaviska Enskilda Banken SEB banks. There are two main fundamental differences when Sweden is compared to other European corporate models; the whole ownership of shares on the stock exchange is controlled by just a few holders. Secondly, the capital base that this ownership is constructed on, is usually much smaller compar ed to other EU countries. Nevertheless, even the most stable models have their weaknesses. During the last two decades, there had been some drastic transformations in the corporate models within Swedish organizations.The most challenging is the rise of foreign investment and ownership in domestic firms. This has been more dramatic than any other industrialized countries in Europe, shifting the power of control and operation from foreign owners. Hence, as Henrekson and Jakobsson (2003) propose, new models are likely to form under the inadequacy of the traditional one; first and the least likely it is the complete ownership by foreign investors – where domestic firms transform into subsidiaries to companies such as multinationals. â€Å"Dispersed ownership†, as in shared ownership between foreign investors and Swedish owners where no one supersede the other in terms of control.Having an external institution such as the state pension or corporatist as owners; more probabl e as currently joined with the central government they are already biggest shareholders of stock exchange. Lastly and most likely to surface is the ownership by entrepreneurs supported by public authorities; especially during crisis where governments put more faith in worthy investors to The observed changes in the financial exchanges within German economy forecasts a certain extent of convergence towards a market-oriented financial model. However, due to the deep roots of German customs in its bank-firm relation, certain aspects of its corporate governance will remain nchanged in the near future due to the emphasis placed on â€Å"Mitbestimmung, or co-decision and co-responsibility† culture quoted by Hacketal et al. (2003) and other scholars in defense of the German persistency in relational structure. On the other side, the predictions for corporate governance amendments are various in shape and none will be take over completely in the future. Some conceive of more coordina tion from the government and other less so. But it is for certain that the old model will lose its dominance over time and the Swedish overall corporate structure will become more market-oriented for economic wellbeing. 2. 6 Wage distribution and inequalityA CME should not only have a highly skilled workforce but when compared to liberal market economies, it should also high wage levels with low dispersion across different deciles of its population. It is essential to look at our two countries starting from the 1990s to have a deeper insight of the impact of the great recession upon its income distributions over the following years, and to verify whether the advancement in modern socio-economic models have weakened their coordination powers. From the study conducted by Bach, Corneo and Steiner (2007), there proved to be a general rise in the dispersion of German market incomes between 1992 and 2003.Using the Gini coefficient, as a â€Å"standard summary indicator† to measure the equality of income levels we can observe that dispersion of market income from the average earners has increased substantially since the 1990s; from 0. 6155 it has gone up to 0. 6522 in 2003. As detailed by the following table, the median income has dropped by more than 30%, being â‚ ¬12. 496 per individual in 1992, compared to â‚ ¬8,173 in 2003. An obvious trend is the accumulation of market income on the top percentile of income earners. Back in 2003, around 41% of total market income was composited within the higher percentile earners. Bach, Corneo and Steiner further point out that â€Å"this group was formed by about 640 individuals, with an average income of 16 million euro, excluding capital gains†.The sources of rising inequality in German income levels are as follow; the unemployed numbers have steeply gone up in the past two decades, Biewen and Juhasz (2010) note that in 2005, there were an estimated peak of five million people registered out of work, with â€Å"more unemployment growth concentrated in the lower part of the income distribution†. This creates a larger income inequality as a huge segment of the low-income population is unemployed, losing their potential income. The different changes in taxation schemes; although it was reduced overall, it has favored top income earners than the rest, distorting the original distribution of income levels.Moreover, the transition in domestic structure such as more single parents and smaller family sizes that have drastically differed from past family average income patterns, as studies by Peichl et al. (2010). Lastly, with the ageing population; Germany now has a much narrower age segment of young adults, and a greater demand for qualification in addition to other factors in demographics that contribute to the wider dispersion of income levels. Although at a very low level, Sweden has also experienced an increasing inequality of income distribution in its income market. The trend has began since the early 1990s, caused if not worsened by the economic crisis, noted by Palme et al. 2003), as the Gross Domestic Product had been consecutively negative for three years 1990-1993, together with the declining employment rate that is more than 10 percent during the period. Then there was an increased number of workers involved in labour market policies, Palme (2006) mentions that† triggered a crisis for the public finances which was then responded by a combination of tax increases and benefits cut†. This had further burdened households’ income levels. We can see from the table that there was a decrease in annual average disposable income from 1992 (1991 as the base year) with â‚ ¬138,000 to â‚ ¬126,000 in 1995, that only managed to pick up again in 1997.However, the figures provided by Fritzell (2001) showed an upward trend of average disposable income levels after the crisis; first, it was due to the rapid rise in capital gains hat helped th e top income percentile with higher earnings, secondly, the wage per hour was increased in all registered occupations. , this was however, slowed down by the growing unemployment in the same period. To measure the inequality of income dispersion, we will again use the Gini coefficient and the poverty rate. The inequality has risen since the beginning of 1990s, Palme (2006) proves, from 0. 219 it has increased to its peak – 0. 279 in 2000. The reason is the adjustments in the taxation systems that strongly affected households in making serious financial decisions. Despite the economic slump during the 1990s, poverty rate in Sweden has not changed largely which is phenomenal considering the extent of the recession all European countries faced.It is not until 1999 where poverty started to pick up but is again astonishing as Swedish employment figures were still healthy even when compared internationally. Conclusively, German central coordination is losing its battle to market po wers, becoming less effective in moderating wage equality in recent decade, as the intention of keeping a low dispersion of income levels has began to give way modern socio-economic developments. Sweden, however, when compared to the rest of European countries, is doubtless a strongly CME in terms of moderating its equality of market income levels and keeping its poverty rate to the lowest and most stable within the union. 3. ConclusionChanging demographics, socio-economic and technological patterns have created mass distortion in traditional market structures in both Germany and Sweden. After looking at them in five different aspects, we learn that there is decreasing participation of social partners in collective terms in both countries but much less in Sweden, thus a decreasing value for collective bargaining; wage inequality is more dispersed in Germany than in Sweden; while corporate structure in both countries have become more market-oriented in time but still retains usage of old models; and German still contains a mixture of public training whereas Sweden is moving quicker towards privatized programmes.Conclusively, although both countries have become less coordinated than few decades ago, Germany has got a greater degree of decentralization compared to Sweden, taking higher level of reforms in its economic structures while Sweden tends to cling more onto traditional coordination values. 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