Posted by: Dirk | January 20, 2008

Lost in Germany: Nokia is moving eastwards

This week German newspapers were full of articles on Nokia closing a heavily subsidized plant at Bochum in the Rhine-Ruhr valley. Apparently 41 million euros were handed out to Nokia in order to create around 4000 jobs. It seems like Nokia created the jobs and now that it doesn’t have to keep them, it is moving the plant to Cluj, Romania. The regional government there has invested around 60 million euros in order to create the Nokia village. Now German politicians are up in arms. Some want the subsidies back, some want to put down their Nokia phone. It is of no help that a German firm will set up the new plant in Romania, generating a turnover of 40 million euros.

Until now it seems that legally Nokia didn’t do anything wrong. I think many politicians fall prey to the old think of nations that compete with each other. This ide, centered on competitiveness, stresses the point that nations compete on global markets, just like firms. So if Romania gets the Nokia plant, they win and we lose. Period.

What’s wrong with this way of thinking, you might ask? Well, competitveness can be a dangerous obsession. Nations are not like firms. First of all, firms go bust if they are not successful. Nations devalue if they are not successful at selling (= exporting). Also, nations trade with each other, which is something that firms don’t do. And there are gains from trade, even if say Germany and France trade wine and cars with each other. According to Krugman’s article, the growth rate of living standards essentially equals the growth rate of domestic productivity – not productivity relative to competitors. The obsession with the outsourcing of jobs always plays into the hands of populist politicians with nationalist reflexes. Sure, the government should take care of the fired workers, try to retrain then, so that they finally will move into other jobs. Especially here in Germany, these institutions are already in place. Our social system is among the most expensive in the world, and it does deliver.

So, you might ask, what will happen if more firms move to Eastern Europe? Well, there is a limit to this: the number of qualified workers. The Financial Times reported that the region has an abundance of jobs and is lacking skilled workers. This is what they write about neighboring Poland: engineers, technicians and factory hands are all in short supply. Apparently, workers emigrate to places like Ireland where real wages are higher. This led to average gross wages rising more than 7 per cent in Poland in the first 9 months of 2007, and more than 15 per cent in Romania, according to WIIW. In times of economic integration there is always some movement of jobs across borders, but there clearly is a limit to it. Whoever says otherwise is probably out to scare you.

UPDATE 03/02/2008: On the long-run determinants of growth see here.

UPDATE 06/04/2008: Nokia cannot be sued for fraud, the district attorney of Bochum has found. North Rhine-Westphalia can still try to bring charges in a civil suit. However, it doesn’t look very likely now. It seems that Nokia fulfilled their part of the subsidies deal.

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