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Each Country Is Different
Today: Germany, France, and the UK show how different contexts call for different sets of practices.
The Agenda 👇
There’s no such thing as best practices
Germany is all about exporting high-end manufactured goods
France is all about consuming domestically produced proximity services
The UK is somewhere in the middle
Because the economy used to be global, we have this idea that there are best practices that work no matter where you are. An entire set of them was once combined as part of the Washington Consensus: privatization, structural reform, free movement of capital, a more flexible labor market, etc.
Today, the world economy is much less global, but we’re still confronted with recommendations for global best practices that could supposedly solve various problems, like:
Growing tech startups. As I’ve written many times in the past, we long thought there was one best way to do it (the Silicon Valley way), but now China has helped us realize that there are at least two (very different) ways—which means there are also probably many more.
Fighting the pandemic. The virus is the same, but approaches to containing it vary depending on geography, institutions, and culture. The countries that are succeeding in the face of COVID-19 aren’t those that are best in class at applying a given set of best practices; they’re the ones which account for their specificities and design their policy accordingly.
On that, I was struck by this recent article in the Wall Street Journal about South Korea recovering from the pandemic (from an economic perspective) because its economy relies heavily on exporting manufactured goods:
South Korea’s recession ended in the third quarter of the year with the economy growing 1.9% from the second quarter. The country’s commendable control of Covid-19 has helped—but like China, its pre-existing economic structure was also key.
The real secret sauce for coming back from Covid-19 has been a mix of the two: getting the virus under control early, and benefiting from an existing export-heavy economic model.
At 5.5 percentage points, exports made the largest contribution to Korea’s GDP growth since at least 1960. Without that export boom, a slump in capital investment would have left Korea in recession. Private expenditures dropped 0.1% quarter-on-quarter.
A lift in exports has an outsize effect on Korea because the economy is far more trade oriented than most. In 2019, exports ran to about 40% of the country’s GDP, compared with 18.4% in China and 11.7% in the U.S.
It reminded me of something. Back in the Spring, I interviewed my friend and co-author Bruno Palier for the French-speaking media Nouveau Départ that I cofounded with my wife Laetitia. The topic was the welfare state, but Bruno pointed out how different the three major European countries are from an economic perspective and why that necessitates very different sets of policies.
🇩🇪 Let’s start with Germany, which I’ve covered quite a lot in the past (and where I’m about to move—in two weeks!). In short, Germany’s economic growth relies almost entirely on exporting high-end manufactured goods. As a result, Germany needs to maintain wages at a low level while making life affordable for workers; it needs a stable monetary system with stable foreign exchange rates; and it needs a secure world where free trade is the norm.
These conditions are far from all being met at all times, but here’s where Germany stands on the most critical fronts these days:
When it comes to the pandemic, they’ve just ordered a month-long lockdown, but I expect it won’t have that much effect on their economy. Factories will keep on churning out manufactured goods and ships will keep on transporting them to their destinations.
As for Germany’s opportunities in building startups, they are mainly in upgrading their export capabilities (hence their passion for Industry 4.0 and other things), and doubling down on their embrace of international expansion, even if that’s in services rather than goods (which is exactly what Rocket Internet was all about: replicating a tech-driven service business from geography to geography).
But there are also opportunities to be seized by startup founders in making everyday life more affordable for low-paid German workers, which means that from a German founder’s perspective there are as many opportunities in proximity services as there are in manufacturing.
I wrote as such three years ago, in my first round of thoughts about Germany in the Entrepreneurial Age:
An ageing society with a culture of thrift and operational excellence is uniquely positioned to grow technology-driven, job-intensive proximity services in industries such as retail, healthcare, personal care, hospitality, and last-mile logistics. In practice, German customers (among them the growing proportion of senior citizens) could push up local, fast-growing startups on the German domestic market, then those would turn into global tech giants to create and capture value elsewhere.
🇫🇷 Now, what about France? For as long as I can remember, French officials have had an inferiority complex regarding Germany, which has led to trying to emulate the Germans in many respects: a more stable currency, maintaining wages at a low level, and an embrace of free trade.
And yet the French economy couldn’t be more different from Germany’s. France isn’t much of a high-end export powerhouse (and is becoming less and less so, if you exclude luxury goods sold by LVMH). Rather it’s the realm of low-end proximity services, mostly consumed domestically by a large population bankrolled by a generous welfare state.
Exports represent only 31% of the French GDP, compared with 47% in Germany (and 43% in South Korea). In other words, we rely less on international trade, which in a way is a good thing as pointed out by Peter Zeihan; but it also means we need steady domestic demand (and foreign tourists) if we want the French service economy to keep working.
Therefore all efforts by the French government to emulate Germany when it comes to economic policy are in vain. What works for Germany doesn’t work for France, and vice versa. And so here’s where France stands on the two important issues of the day (fighting COVID-19 and building startups):
I expect the second lockdown to be a massive blowout for the French economy. When economic growth relies on proximity services (especially in the hospitality industry), there’s nothing worse than closing everything down in the face of the pandemic. Germany can afford it, France can’t. That means France should have been twice as careful when it came to containing the virus to avoid the extreme step of a second lockdown and dire economic consequences.
As for building startups, what I just wrote should confirm something we already know: French people suck at exports. On the other hand, they excel at serving their domestic market. That explains why the most prominent French startups now have a strong domestic focus, as is the case with our portfolio company Payfit, specializing in payroll management, and even more with a company such as Alan, the French version of the health insurance startup Oscar.
🇬🇧 Finally, let’s have a look at Britain. It’s a bit of a hybrid: an exporter like Germany, but also reliant on proximity services as in France. Regarding exports, at the core Britain’s economic growth is lifted up by exporting financial services and building on intangible assets, such as in entertainment and now technology. The domestic complement to this part of the British economy marked by increasing returns is a massive local industry focused on cheap proximity services (basically, all the pubs and the restaurants in London, as well as gyms, yoga centers, mobility services, etc.).
What about the lockdown? It will likely be a shock to Britain, because it means that:
Most office workers, especially in financial services, can keep on working and exporting what they produce (exports are 31% of Britain’s GDP, exactly like France, but likely less food and more financial services and tech-driven services). However they’ll work from home, which is a blow to businesses in proximity services in the City, and...
In any case, most shops, gyms, and restaurants are forced to temporarily close down, which will have widespread consequences across the different layers of British society. Like France, the UK should have been much more proactive than Germany at doing everything it could to prevent a new lockdown because it depends so much on proximity services and workers in this sector earning a living wage—even if, unlike France, the UK still has the cushion of exporting high-end services and can count on being lifted up by faster economic growth in other parts of the world.
What about building startups? Britain is actually in a sweet spot: it can innovate in proximity services (that’s Deliveroo), and it can innovate in industries dominated by intangible assets (that’s Revolut) so as to rely on its proven ability to export value-adding services all around the world, starting with Europe.
And that’s the paradox here: the UK is about to leave the European Union, which will harm the part of its economy that, in theory, could keep delivering economic growth even during a lockdown. This explains why an increasing number of people are calling for putting Brexit negotiations on hold while Britain fights the pandemic.
Are you in one of these three European countries? Does my analysis make sense? What do you think?
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From Normandy, France 🇫🇷