The broad opinion among politicians and scholars seems to be that in the age of globalization, it is essential to expand markets, liberalize trade and capital ties, and increase the flexibility of labor markets. Since the 1980s, when neoclassical and/or neoliberal theory has predominated, economic strategies centered on market freedom have been implemented both domestically and internationally/in Europe. This trend has been accelerated by the pace of “globalization,” the demise of state socialism, and the European internal market. With the collapse of the USSR in 1991, the advantages of a free market economy over a centrally planned economy were amply demonstrated.
Liberal market economies (LME) and coordinated market economies (CME) are the two basic types of free market economies. The main differences between liberal and coordinated market economies can be summed up as follows: in liberal market economies, hierarchies and competitive market structures coordinate the activities of businesses, whereas, in coordinated market economies, the main emphasis in terms of activity coordination is placed on non-market relationships (Frege and Kelly, 2013). It is impossible to conduct a thorough analysis of global economic developments without taking Germany and the United States of America into account. This paper addresses fundamental differences between liberal and coordinated market economies by providing an example of the United States as a liberal market economy and Germany as an example of the coordinated market economy. It claims that the type of market economy is crucial in explaining the differences between the US and Germany.
LMEs are distinguished by industrial/employment relations systems that are “market based.” These three economies have traits like a strong decentralization of bargaining, extensive individualization of employment, different types of employment flexibility, and competitive HRM practices that allow businesses to adapt quickly to changes in current profitability (Frege and Kelly, 2013). For example, implementing layoffs or luring workers away to improve skills and competencies. On the other hand, LME environments are defined by competitive tactics like layoffs and labor poaching, whereas CME nations are characterized by interlocking systems of industrial relations, training, and education that work together to remove salaries out of competition (Frege and Kelly, 2013). CME settings may offer more incentives for people and businesses to invest in competences, such as firm-specific talents, by reducing competitive impulses and generally enhancing regulatory protections against employment flexibility.
Indeed, the simplest way to explain these discrepancies is to relate to a number of other mediating factors, which in turn relate to the governments’ different capacity for reform. Countries’ varying degrees of economic vulnerability are among them, as are actors’ preferences regarding maintaining or changing long-standing policies and practices in the face of economic pressures. States’ political institutional capacity to negotiate or impose reform is also crucial factor. Finally, public discourse may improve political institutional capacity by convincing societal actors that reform is both necessary and appropriate in the face of crisis.
Therefore, it can be said that the LME type or CME depends on the various institutional factors that were established throughout history (Frege and Kelly, 2013). However, based on the mediating elements, even nations with identical configurations of state tactics, market economies, and welfare systems have vastly different capacities for reform. Thus, among “liberal” states, the UK has proven to be more capable of reform than the US; among “enabling” states, the Netherlands has made more reforms than Germany and Denmark have made more reforms than Sweden; and among “enhancing” states, France has made more market economy reforms than Italy has made to its welfare state.
Differences in the design of the institutions used to settle contractual disputes between economic groupings are cited as the basis for the divergence between liberal and coordinated market economies. Accordingly, cost competitiveness and the framework for radical innovation are the key benefits of a liberal market economy like the US, but this type of market economy also has drawbacks in terms of the ability to benefit from both unique skills and incremental innovation (Frege and Kelly, 2013). Similar to coordinated market economies, it is difficult for businesses to gain more market share solely through cost reduction and to gain a competitive edge without implementing radical innovations. However, coordinated market economies do benefit from higher levels of specialized skills, wage moderation, and the use of long-term capital.
According to Antonczyk et al. (2018) discussion of the liberal and coordinated market economies from the standpoint of innovation, radical inventions are more common in the former while gradual but continuous advances are more common in the latter. Every business entity that is planning to enter the markets of the US or Germany should consider that it would be impacted by this specific distinction between liberal and coordinated markets. For example, if an organization is going to be established in the US, the company would be better able to implement radical changes in various operational aspects. Otherwise, if the company chooses to be in Germany, such radical changes will have to be more gradual due to an increased level of dependence on various types of other institutions.
A business entity to be established in either of these nations will be directly influenced by the significant disparities in industrial relations between liberal and coordinated markets in general, and between the US and German markets in particular. For instance, in a liberal economy, industrial relations coordination and talks in the US are only permitted at the firm level, whereas in Germany, they are founded on the concept of collective bargaining and are conducted at the sector level (Antonczyk et al.,2018). For instance, in Germany, institutions related to a certain sort of business are involved in and support the conduct of industrial relations there, whereas in the US, no such infrastructure exists (Antonczyk et al.,2018). In Germany and other nations with a coordinated market economy, associations and organizations exist in every sector of the economy, and they have the capacity to actually affect any specific organization within the sector.
In contrast to Germany, where long-term employment, frequently with a single company, is usual, the US labor markets are regarded as being extremely mobile and unregulated. If a company want to allocate significant resources to recruit and develop highly competent professionals, it is preferably to choose Germany. This is because in the US, there would be a great likelihood that the specialists would want to leave their jobs and occasionally even join competitors, wasting the resources that were invested in them (Antonczyk et al.,2018). Instead, Germany would be a better option because experts there are anticipated to work there for a longer period of time, making any investment in them a strategic one.
Another distinction between liberal and coordinated market economies that can be made is how companies interact with one another. In particular, inter-company contacts in liberal market economies like the US are solely based on free market economy principles, with no or only a limited participation of any third parties like associations and diverse organizations, as Ferragina et al., (2017) explains. As a result, there aren’t many overarching guidelines that businesses can follow, and too many decisions are dependent on the leadership styles and skill sets of the CEOs of the two businesses involved.
On the other hand, Germany offers a wide range of collective bargaining, training, and education among businesses in the same industry, all of which have shown to be very beneficial in addressing difficulties like establishing industry standards and quality control procedures. One of the particular characteristics of the German market, according to Ferragina et al., (2017) is a higher level of competitor collaboration as well as organized group bargaining through associations.
Additionally, there are significant differences between the US and German companies’ ties with their suppliers, with the German companies forming long-term partnerships with them while the US companies choose their suppliers based on their current needs. As such, Germany is once again a better choice for a company that want stability with partners. Long-term partnerships with its suppliers will help the company in that suppliers will become familiar with its corporate culture and develop their products and services in line with it to best meet the demands of the company.
When deciding whether to engage in any kind of commercial activity in a given nation, consideration is given to the forms and characteristics of corporate governance as well as the financial markets in that nation. The corporate governance and financial markets of the US and German markets are therefore briefly examined in this paper. With regard to the worker and shareholder decision-making power, Ferragina et al. (2017) differ between US and German corporate governance. Particularly, in the German coordinated market economy, certain management members who have been nominated by the supervisory board make the majority of the decisions, as opposed to the US liberal market economy where stockholders hold and exercise the bulk of the decision-making authority. Due to the fact that the majority of the company’s shareholders are driven by their preference for immediate benefits in the form of dividends, whereas company management is more focused on long-term development and is also equipped with more pertinent theoretical and practical knowledge, this difference has profound implications on the strategic development of the company.
Germans treat their own workers with a high level of trust, carrot incentives, rigid career paths, and regulated internal labor markets because they have laws and regulations that make it difficult to fire employees without cause, as well as a strong stakeholder model that allows employees to hold half of the power in the supervisory board along with the management (Antonczyk et al., 2018). As they view personnel as resources rather than costs, they make investments in those who have specialized training and abilities. Industrial relations (employers and union association) are strongly and effectively mandated in Germany due to the coordination issues among businesses (Antonczyk et al.,2018). Law requires both works councils and unions to play significant roles in the German economy. Because of this, relationships between economic actors and other businesses are enduring and based on a high degree of trust.
Contrary to CMEs, LMEs primarily finance their businesses through the markets by making all relevant information public, demonstrating a solid reputation with no risks, which is valued by the share price. As a result, they must reduce expenses to a certain degree in order to turn a profit, which is difficult for their own employees because the labor market is unregulated, flexible, and external. In the US in the early 1990s, employees must defend their right to work for the corporation because the law is unable to adequately protect them. Additionally, because employees are typically seen as costs by businesses, they do not invest much in them, relying instead on broad and transferrable abilities (Antonczyk et al., 2018). Since this LME has limited long-term goals and no mutual trust, if something negative occurs, all participants will simply leave or the management will be replaced.
The degree of wage coordination is substantially higher in the German system, where pattern negotiation between company and labor union federations has historically been the norm.
Contrarily, there is no true pay coordination across enterprises in the US, and when it does, it takes place firm by firm. Statistics on collective bargaining coverage and union density are also instructive. In Germany, joining a union is a voluntary affiliation distinct from being covered by collective bargaining. With only a few percentage points separating the two numbers, being a union member and being protected by a CBA are significantly correlated in the US. Workplace representation is handled by both labor unions and works councils in Germany, however only labor unions are in charge of workplace representation in the US. Last but not least, while required in Germany, board-level representation is essentially unheard of in the US.
Around 90% of German businesses are set up as federations of businesses (trade associations and employers’ organizations), and membership in chambers of commerce and industry is required for every business. Additionally, using the metalworking sector as an example, employers’ organizations represent businesses that employ more than 60% of all workers, but the Federation of Employers’ Associations, based on its own data, represents almost 75% of all businesses and 80% of private sector employees (Antonczyk et al., 2018). They must negotiate with the DGB’s three major and five minor trade union organizations as employers.
With the release of Michel Albert’s book “Capitalisme contra Capitalisme,”(1991) the stability of CME types of capitalism was initially questioned. The CME type is significantly more successful in social terms. However, Albert contends that as globalization advances, the LME type – and thus the market-based capitalism of the USA – will triumph over economies of the CME type. Beginning in the 1980s, liberal states adopted reformist strategies that aimed to lessen the state’s interventionist role. This was done by relying on less direct means of achieving state ends and by enlisting private actors to produce public goods and carry out public objectives, substituting more fairly for fairly. Market preservation was the main goal of market economy reforms, which intended to create framework laws that would place decision-making power in the hands of businesses and restrict the influence of organized labor. For the majority of liberal states, including the US and the UK, this required strategies that included privatizing and deregulating business, crushing union power to promote the decentralization of labor markets, and passing laws that gave firms the most hiring and firing flexibility possible.
Welfare reforms were equally as ambitious. As basic pensions grew even more basic and pensions were largely privatized above the basic minimum, “liberal” governmental methods with relation to the employed increased individual responsibility for welfare provision. While in the 1980s the main concerns for the jobless were decreasing social assistance and unemployment benefits, by the mid to late 1990s the main concerns had changed to moving individuals off the welfare rolls through workfare while enhancing equality of opportunity.
Together, these reforms have led to a scenario where the market economy is characterized by low job security, high pay inequality, high labor mobility, and high job participation rates, but also by low unemployment. The fundamental issue in the welfare sector is poverty, particularly because social transfers do not sufficiently reduce the degree of poverty. But despite these broad parallels, countries’ reform initiatives have taken varied paths and achieved varying degrees of success, partly as a result of variations in institutional political capacity and debate. With regards to Germany, due to the corporatist relationships with the social partners (business and labor) and the national division of power with the Länder (the federal states), Germany has had little progress toward reform. This is mainly because the governmental authority is diffused, and reforms must be negotiated among a diverse range of actors.
According to Antonczyk et al. (2018) enterprises in Germany’s coordinated market economy focus on a fixed set of high-quality products, have an adequate supply of skilled laborers, have a lasting relationship with their workforces, and have a strong connection to a certain location of production. Walker et al. (2019) note that these historically close couplings are eroding due to the sheer logic of digital platforms. The disruptive, growth-obsessed world of digital platforms and Germany’s diverse, high-quality output are by no means a natural fit. However, large platform economy businesses seek to expand into the German market, and German consumers seek out the convenience they offer. The German economic and social model is thus being put to the test by the economy’s and the workplace’s increasing digitalization. Since the early 1990s, this has already been deteriorating more and more.
International (exogenous) change processes, such as deeper European integration and globalization, have a lasting impact on successful productivity constellations in addition to domestic (endogenous) factors like demographic change, the effects of German reunification, and trends towards knowledge intensive services. Symptoms of this trend include a lack of trained labor, a decline in the proportion of businesses and workers covered by collective bargaining agreements, and an increase in unusual types of employment. A functionally connected state that operates incrementally and through negotiation is a key structural element of Germany’s coordinated market economy (Gallego‐Álvarez and Quina‐Custodio, 2017). This state uses initiatives to direct the adjustment of the overall political and economic system in order to keep up with political and social change. Institutional constraints, such the strong political coordination between individual states and the federal government, as well as global influences, like European integration and economic globalization, limit its ability to make policy.
As it can be seen the difference in economies differ the countries, the US and Germany. The former favors ownership and free trade with minimal intervention from the state while the latter is relatively restrictive. These conditions indeed influence on different aspects of those countries like population and employment. The LME type aims to assist workers in adjusting to the shifting labor market demands by using market-based decision-making concerning labor markets (and other economic areas). Instead of using the so-called “high road” approach to legislation, which aims to direct change by, for instance, protecting high-skill, high-wage positions, LMEs meet employers’ desires for lower labor costs. As the US lacks institutions that aggregate preferences for public goods like high-skill development, it is referred to as an LME.
The capitalist economies of Japan and Europe, on the other hand, are CME, in which individual choices are limited by institutional rules. These rules support multi-party negotiations, bank commitments to industry, cooperative bargaining between unions and employers, and close coordination between workplace and educational institutions (Walker et al., 2019). These inter-organizational modes of decision-making assist ensure agreement for the creation of public goods, the provision of which much exceeds that in the US while limiting the social consequences of individual rational decisions, such as underinvesting in education and training.
Institutions create guidelines for how groups interact, whether in the form of restrictions, rewards, or resources for problem-solving. Authorities and financial resources are distributed through institutions. As nation-states have different profiles of governmental authority, electoral systems, interest group organization, and other factors, they inevitably differ in how they manage industry organization and labor markets (Walker et al., 2019). These characteristics largely account for the variations in capitalism across countries. According to this viewpoint, the United States is a political economy with a unique set of institutions that limit or otherwise direct people into acting in a way that reproduces the production system. The United States, which already had the highest level of liberalism in terms of encouraging a market-based approach to decision-making, has increased its level of liberalism as a result of global economic forces, while Western Europe, especially Germany which already had institutions for coordination in place, have introduced new strategies for collective action.
The economies of Germany and the USA have a number of things in common, including being global leaders in high-tech manufacturing, being dominated by big multinational companies, and having some of the highest levels of consumer spending on the planet. The present economic crisis, which is shaping up to be the worst recession in living memory, is one of the best opportunities to compare the industrial economies of Germany and the US. The economies of both countries entered recession in 2018; for the following year, it is expected that the US economy would contract by 6.1% and that of Germany will contract by 6.6% (Walker et al., 2019). In general, the decline in industrial output in the US has been greater than that in Germany. Compared to Germany’s output decline of 8–10%, the United States’ output has fallen by 11–15% so far in the year of 2018 (Walker et al., 2019). Instead of having much to do with the type of industry in either country, this may be partially explained by Germany’s ability to resume output more swiftly than the US.
The US and German stock markets plunged in March before quickly rebounding to the point that each is almost at pre-crisis levels of market capitalization. This phenomena has been generally comparable for both countries’ stock indices in subsequent months. International investors are confident that the economies of the US and Germany will rapidly emerge from the current crisis. Due to the stark differences in their industrial economies, Germany and the US are among each other’s two major trading partners. Each provides a special offering that the other needs.
Reference List
Albert, M. (1991) Capitalisme contre capitalisme, Paris: Le Seuil.
Antonczyk, D., DeLeire, T., and Fitzenberger, B. (2018) ‘Polarization and rising wage inequality: comparing the US and Germany,’ Econometrics, 6(2), pp. 20.
Ferragina, E., Feyertag, J., and Seeleib-Kaiser, M. (2017) ‘Outsiderness and participation in liberal and coordinated market economies,’Partecipazione e conflitto, 9(3), pp. 986-1014.
Frege, C, & Kelly, J (eds) (2013) Comparative employment relations in the global economy, Taylor & Francis Group, London.
Gallego‐Álvarez, I., & Quina‐Custodio, I. A. (2017) ‘Corporate social responsibility reporting and varieties of capitalism: An international analysis of state‐led and liberal market economies,’ Corporate Social Responsibility and Environmental Management, 24(6), pp. 478-495.
Walker, K., Zhang, Z., & Ni, N. (2019) ‘The mirror effect: corporate social responsibility, corporate social irresponsibility and firm performance in coordinated market economies and liberal market economies,’ British Journal of Management, 30(1), pp. 151-168.