Debate about Germany's poor economic performance following unification focused on supply-side weaknesses, and the associated reform agenda sought to make low-skill labour markets more flexible. We question this diagnosis using three lines of argument. First, effective restructuring of the supply-side in the core advanced industries was carried out by the private sector using institutions of the coordinated economy, including unions, works councils and blockholder owners. Second, implementation of orthodox labour market and welfare state reforms created a flexible labour market at the lower end. Third, low growth and high unemployment are largely accounted for by persistent weakness of domestic aggregate demand, rather than by failure to reform the supply side. Strong growth in recent years reflects the successful restructuring of the core economy. We also suggest how changes in political coalitions allowed orthodox labour market reforms to be implemented in a consensus political system. JEL: E65, J50, P52
This paper uses a survey of 3,300 firms in 25 transition countries to shed light on the factors that influence restructuring by firms and their subsequent performance as measured by growth in sales and in sales per employee over a three-year period. We begin by surveying what a decade of transition has taught us about the factors that determine how firms respond to the new market environment. We go on to analyse the impact on performance of ownership, soft budget constraints, the general business environment and a range of measures of the intensity of competition as perceived by a firm. We find that competition has an important and non-monotonic effect on the growth of sales and of labour productivity: some degree of perceived market power is associated with higher sales growth, but competitive pressure is also important. Similar competition effects are found upon firms' decisions to develop and improve their products, but market power has an unambiguously negative impact on purely defensive (cost-reducing) restructuring activity. New firms have grown relatively fast, but among old firms ownership per se has no significant relationship to performance (though state-owned firms have engaged in significantly less development of new products). Soft budget constraints have a broadly negative and the business environment a broadly positive impact on restructuring and performance.
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