In 2008, Chancellor Angela Merkel announced that financial support of the education and research sector is her key policy objective for the coming years. She explicitly called for a “Education Republic of Germany" (“Bildungsrepublik”). This policy objective is crucial because of an intensification of international competition in business, the demographic challenge and the fact that Germany has no natural resources other than human capital. In the future, preserving living standards and prosperity means: Education for all! So where do we stand four years after this groundbreaking announcement?
Unfortunately, the announcement reminds me a bit of the Lisbon strategy in Europe. Its aim was to make the EU “the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion,” by 2010. The achievements are negligible in Europe and Germany.
The demographic situation is still the biggest challenge for Germany and the industrialized world. The world’s population is rising fast: It needed 250,000 years to reach 1 billion, which was doubled in the following less than 2,000 years, reaching 2 billion in 1927. Eighty years later, in 2011, the world’s population has grown to 7 billion. By 2050, the United Nations (UN) estimate as many as 9.3 billion people will inhabit earth. Fortunately, it seems that growth in the world’s population is actually slowing down. The peak of population growth was in the late 1960s. At the moment, almost half the world’s population lives in countries with fertility rates of 2.1 or less according to the United Nations. The fertility rate depicts the number of children a woman can expect to have. However, most European countries, including Germany, have fertility rates far below the replacement level of 2.1.
There is plenty of evidence that some of the wealth creation of the past 50 years was caused by the so-called “demographic dividend.” The demographic dividend tends to boost the phenomenal growth rates in China and India, for example. A study by Australia’s central bank calculated that a third of East Asia’s GDP growth in the period of 1965 to 1990 came from its favorable demographics. Similarly, a third of America’s GDP growth from 2000 to 2010 can also be explained by its increasing population. So what can Germany do?
The simple answer is more investments in research and education. This was exactly the motivation of Angela Merkel in 2008. In 2011, the expenditures for research and education in Germany accounted for 8.9% of the annual public budget of 1.056 billion Euro. With this number Germany still remains below the OECD average. The education spending did grow throughout the last few years in Germany. However, the number of students grew faster due to the fast track option in high school (“G8”) and the replacement of the obligatory military service, and the public education budget is declining in relation to GDP in Germany. This is partly a temporary effect, but even if we exclude the temporary effect, the higher-education system is by no means competitive when compared on an international basis. Internationally, there is plenty of evidence that the teaching duties in the higher-education system are not competitive in Germany. This condition makes it almost impossible for German universities to attract foreign professors, who would add to the education’s quality through new perspectives and the transfer of “foreign” skills. In addition, the standard salary levels do not fit the importance of education in an aging society. Consequently, we have seen a significant brain drain in the past years.
Despite the disappointing policy, the European crisis shows that policymakers are able to learn the lessons, even if it is almost too late. What is the lesson here? Demographics and productivity are headed in the same direction – the more elderly, the lower the productivity. Both forces reduce economic growth and thus the future living standard. Therefore, the only way to turnaround, or at least stop the process, is to focus more on education and research. Education enables people to become more productive, and thus compensate for the productivity decline of the demographic effect. Only this will preserve the present standard of living.
The financial crisis and sovereign debt crisis is just a catalyzer of this process. If China and India can avoid a blow-up in the next decade, they are likely to become the world’s biggest economies. Nevertheless, as long as innovations are born in Europe, there is hope. Contrary to some forecasts, the growth of emerging economies is unlikely to continue at the same pace due to new barriers. If emerging economies become more developed and enter the difficult middle-income phase, their growth will have to slow down almost automatically. These economies will face similar demographic challenges as the people become more educated. What it is left for Germany to say? The pessimistic attitude is probably as exaggerated as the optimistic with regards to the major competitors. Europe’s high-end industries and Germany’s top quality goods are not easily mimicked, securing their strong global position. However, all this points primarily toward a call for significantly higher investments in research and education, especially for the whole higher-education system. If it were so easy to tackle the challenges of demographics, all developed economies would already be growing faster than Germany.
Read more in this column Bodo Herzog: The False Appeal of Central Banks