Part A: Role of Institutions in Economic Growth and Development
The growing debate on the importance of institutions for economic growth and development has been simplified, leading to potential bias over the last century. Consequently, institutions have become a vague concept viewed as the intermediate target for all efforts to improve economies globally (Sachs, 2003). As such, people always blame institutions whenever something is wrong with the economy. However, Sachs (2003) argues that institutions matter, but they do not do so exclusively. He argues that the existing challenges to the economic development of the poorest countries are far more complex than institutional shortcomings. Sachs (2003) argues that it would be more prudent to focus on fighting AIDS and other killer diseases, enhancing soil nutrients, and building important road and communication infrastructure in Sub-Saharan Africa instead of improving institutions. Hence, Sachs (2003) believes that institutions play a positive role in a country’s economic development and growth but should not be considered the sole determinant of economic prosperity since the economy is a large aspect depending on several factors to attain higher growth and development.
Monetary institutions play essential roles in economic development and growth as they control the amount of money printed and circulating in the economy. Budget institutions are crucial in determining the allocation of funds across different economic sectors and taking corrective actions to adverse variances (Rodrik & Subramanian, 2003). The authors explain that these institutions are market stabilizers as they ensure low inflation, minimize macroeconomic volatility, and avert financial crises. Other examples of monetary institutions acting as stabilizers are the central banks and exchange rate regimes. Hence, the effective distribution of financial resources in an economy depends on the strengths of its monetary institutions to ensure economic activities across different sectors in the long run.
Institutions help in regulating and legitimize markets in an economy, leading to better economic growth and development in the long run. Market regulators are institutions that deal with externalities, economies of scale, and imperfect information (Rodrik & Subramanian, 2003). These entities ensure that nobody gains an unfair advantage in economic activities, minimizing the potential economies of scale that may create a monopoly and eliminate unproductive externalities. They include regulatory agencies in telecommunications, transport, and financial services. On the other hand, legitimizing institutions provides social protection and insurance in the economy while redistributing and managing conflicts. Effective management of such institutions allows peaceful coexistence in the economy, making people of all ages participate in economic development and reap its benefits (Acemoglu & Robinson 2008). Such institutions include pensions, unemployment insurance schemes, and other social funds.
Institutions’ effectiveness depends on the States that hold them to optimize their importance and roles in economic growth and development. Kanani and Larizza (2021) explain that institutions are entrenched in a nation’s social context affecting how they function and their impacts on economic growth and development. They defend their stance by stating that democratizations have increased GDP per capita globally by 20% in the long run, hence making political institutions essential for a country’s economic growth and development. However, the authors explain that the unintentional introduction of elections does not make electoral institutions result in better economic growth and development. Instead, electoral institutions depend on the state’s capacity, which relies on the incentives, beliefs, and professional norms that state personnel share. Hence, electoral institutions matter for economic growth and development when employed effectively and intentionally.
Part B: Country Comparison
Germany has a solid legal institution that protects the property rights of every German resident and citizen. Article 14, subsection 14, sentence 1 of Basic law protects land ownership in Germany, guaranteeing private ownership as a legal institution (BDVI, 2022). German guarantee of ownership preserves latitude for the holder of the right in the property rights area, enabling them to develop and shape their life per their responsibilities (BDVI, 2022). Hence, Germany characterizes the legal content of ownership by private usefulness and availability, giving each person the right to use their land as they deem fit. In this case, the constitution is a strong institution in German that offers citizens extensive protection and freedom to utilize the land as they deem fit. The right to own property in Brazil is outlined under Article 5, XXII of the Federal Constitution (Grotti & Advogados, 2022). Brazilian Civil Code explains that land owner has the right to use, enjoy and dispose of their property and defend them from unlawful holding. Brazilian law recognizes only one kind of official real estate ownership: a transfer deed drawn by a notary public and registered with the competent real estate registry (Grotti and Advogados, 2022). Marie et al. (2014) explain that a comprehensive evaluation of the two countries shows that Germany is strong in its macroeconomic stability, innovative capacity, local suppliers’ quantity and quality, judicial independence, intellectual property protection, and infrastructural quality than Brazil. Such points make Germany have a larger trade surplus and a current account surplus than Brazil. Besides, Maslow (2022) outlines that Germany has the sixth-best legal system globally due to its strict regulatory enforcement and robust justice system based on civil law statutes.
Connaughton (2020) reported that 85% of Germans believed there was freedom of the press and that media houses in their country did well documenting the most important stories. In contrast, only 66% of Brazil thought so. Besides, the author reports that 67% of Germans support freedom of the press, while 60% of Brazilians support the same. Therefore, in this case, Germany has more robust media freedom than Brazil.
Germany has a highly independent judicial system than Brazil. German Basic Law Article 97 defines judges’ professional and personal independence of judges. Professional independence requires judges to remain responsible for nothing but the law as they administer justice (Terry, 2015). In this case, each judge must ensure that neither the legislative, executive or higher-ranking judiciary members tell a judge how to decide a case. Such conditions ensure that a judge in Germany makes the final judgment free from external influence. Germany’s high standards of judges’ independence make it a stronger justice institution than Brazil. Besides, the substantial autonomy of the executive, legislative, and judiciary in Germany than in Brazil are vital factors for the strong economic growth and development in Germany than Brazil.
Part C: Variety of Capitalism (VoC) in Germany
The Varieties of Capitalism (VoC) theory is a divisive framework that categorizes a country’s political economy into either a coordinated market economy (CME), a liberal market economy (LME), or a mixed market economy (MME). Hall and Soskice (2001) explain that the VoC is actor-centered, viewing the political economy as a terrain populated by multiple actors that strategically interact with each other to advance their interests. Consequently, the three types of economies have different institutional economic structures, making them have different macroeconomic policies (Silva & Carlos Lopes, 2021). Germany is emerging as one of the typical CME in Europe. The country is characterized by its robust and centralized producers’ association and trade unions, which seek to control wage growth and inflation (Silva & Carlos Lopes, 2021). OECD (2022) reports that Germany had 54% of its employees with the right to bargain, which is higher than the OECD total of 32 and the US 11.6%.
Similarly, OECD (2022) reports that Germany has a trade union density of 16% compared to the OECD total of 15.8% and the US total of 9.9%. These statistics show that Germany leans toward the CME aspect of the VoC with coordinated players seeking to maintain competitiveness. Furthermore, Germany’s concentrated labor market institutions allow the economy to have coordinated wage bargaining arising from the industrial exporter sector and spreading to the sectors sheltered from international competition like the public and the non-tradeable goods sectors (Silva & Lopes, 2021). In addition, Germany has an advanced welfare state and robust labor protection that encourages its workers and companies to invest in vocational training, leading to the development of specific skills. Hence, the German labor market encourages incremental innovation in the long run, a major character of the CME economy, as Hall and Soskice (2001) discuss.
Germany’s solid corporate governance institution institutes make it qualify for the coordinated market economy structure. Mueller (2022) explains that Germany has one of the most solid corporate governance systems globally due to its well-balanced control mechanisms and capital preservation and market transparency rules, and the equal opportunities created for men and women. The author explains that Germany enacted several laws to mitigate covid-19 pandemic, including allowing firms to have virtual general meetings. Every firm must abide by the German Corporate Governance Code, which requires the board to follow a two-tier structure (Mueller, 2022). Besides, the Code requires companies to appoint a management board consisting of natural persons under the supervision of a supervisory board to ensure diversity. It requires at no point should the Board members serve for more than five years. Besides, the supervisory board must consist of at least three members elected by shareholders (Mueller, 2022). Again, a third of the supervisory members must be employee representatives for firms with more than 500 workers. Hence, Germany’s labor market institutions and corporate governance institutions fit within the CME type of economy under the variety of capitalism theory.
Part D: Analysis of Bayer AG
Bayer AG was founded on August 1, 1863, by Friedrich Bayer and Johann Friedrich Weskott as “Friedr. Bayer et comp.” the firm maintained its name until 1881, when it was incorporated as Farbenfabriken vormals Friedr. Bayer & Co. Aspirin (Bayer, 2022a). 1881 saw the transformation of the company into a joint stock entity. The joint-stock was dissolved in 1945 before reestablishing an independent Bayer in 1951 as Farbenfabriken Bayer Aktiengesellschaft (Bayer, 2022a). The company retained its name until 1972 when it changed to Bayer AG (Bayer, 2022a). Bayer AG has retained its headquarters in Cologne since 1912 (Bayer, 2022a). Bayer AG is listed on all German trading exchanges (Bayer, 2022b). The firm is listed in Deutsche Börse Xetra trading under BAYN: GR. The firm is also listed on London Stock Exchange under the symbol 0P6S: LSE. Hence, Bayer AG is a listed company trading its stocks on Xetra and LSE.
Bayer AG raises its funds using equity and debt financing techniques. The firm operates with a capital stock amounting to Euro 2,515,005,649.92, divided into 982,424,082 no-par registered shares (Bayer, 2022b). It also raises its funds by issuing bonds that allow it access to long-term debt. It refinances its operations mainly through US Dollar and Euro debt capital markets (Bayer, 2022b). Its long-term bonds include a 4.7% coupon AT6091454 Corp for USD 727 million maturing in July 2064 and a 4.5% coupon BV4442570 Corp bond for 500 million Euros maturing in 2082 (Bayer, 2022b). However, the company does not retain earnings to reinvest and finance its operations. Bayer AG operates with a dispersed ownership structure since no single owner has a substantial stake in the company to control many decisions. The largest owners are institutional investors, who control 0.05% of the company’s outstanding shares.
Such an approach makes it crucial for the company to follow strict regulatory laws and operates as a limited entity whose shareholders have to vote for major decisions. Bayer AG emphasized proper employee management, offering exceptional training on digitalization to enhance their competence. The company acknowledged that most of its employees undergo training in leadership, project management, and data analysis, as it spent an average of 26.2 hours per employee in 2021 (Bayer, 2022c). The company has its Bayer Leadership Academy, which trains employees on the systematic development of its managerial staff. It also operates functional academies like the Innovation Academy, IT Academy, and R&D Academy that provide advanced training in several disciplines. The classes allow full and part-time employees to undergo the company’s strict compliance and vocational training via classroom and computer-assisted education measures. Bayer has built strong employee management, as displayed by its 90% retention rate of employees, as only 10% left the company over the last five years. In addition, it allows its workers to join trade unions per their wishes. Bayer has adopted a vertical integration growth strategy over the years.
Conclusion
Institutions are a crucial part of economic growth and development. Even though several researchers differ on the role of institutions, nations with strict and strongly-managed institutions have better performances in terms of the GDP per capita than those with loosely-managed entities. In this case, the debate on the roles of institutions has proven essential in understanding how different entities determine the growth of a nation. The most important institutions to economic performance are the market stabilizers like the central bank, market regulators like the regulatory agencies, and market legitimizers like the unemployment insurance schemes. The case of Germany proves the essential role of stable institutions in a CME economy over Brazil’s economy. The more unionized workers and strict corporate governance in the country have led to the nation’s strong economic performance and focus on continual innovation in the long run.
The corporate governance rules outlined in the German Corporate Governance Code qualify it for the CME. Its substantial property ownership rights, higher freedom of the press, and independent legal system allow free and fair trade in Germany than in Brazil, leading to higher economic status in Germany. In this case, one can easily connect the advanced institutional independence in Germany to its outstanding financial performance compared to Brazil. The higher level of institutional autonomy and management is reflected in Bayer AG’s management approach, allowing it to retain its operation status and achieve long-term sustainability. The company’s corporate governance adheres to the German Code, while its capital structure comprises equity and debt financing. In addition, the unionized workforce in Germany has led to Bayer allowing its employees to be part of a workers union.
In contrast, the Code has led to the firm’s more dispersed ownership structure. Furthermore, the CME economic condition that encourages continual long-term innovation has led to Bayer AG investing more in employee training, leading to a lower turnover rate in the long run. Hence, Bayer AG’s outstanding economic record can be accorded to the strong institutions in Germany that affect its long-term sustainability and economic progress. Therefore, this paper has demonstrated the strong ties between a nation’s economic development and growth and its institutions’ state, which affects the management approach of companies within the economy.
References
Acemoglu D., & Robinson J. (2008). The role of institutions in growth and development. World Bank Open Knowledge Repository. https://openknowledge.worldbank.org/handle/10986/28045?locale-attribute=es
Bayer a. (2022). History of Bayer AG. https://www.bayer.com. https://www.bayer.com/en/history/history
Bayer b. (2022). Basic Data on the Bayer Stock. https://www.bayer.com/en/investors/shareholder-information
Bayer c. (2022). Sustainability Report. https://www.bayer.com/en/sustainability/sustainability-reports
BDVI. (2022). Ownership protection for land in Germany. https://www.bdvi.de/en/pas/ownership-protection-land-germany
Connaughton A. (2020, July 31). 5 charts on views of press freedom around the world. Pew Research Center. https://www.pewresearch.org/fact-tank/2020/05/01/5-charts-on-views-of-press-freedom-around-the-world/
Grotti F., & Advogados, P. N. (2022, February 2). The real estate law review – The law reviews. https://thelawreviews.co.uk. https://thelawreviews.co.uk/title/the-real-estate-law-review/brazil
Hall, P. A., & Soskice, D. W. (2001). Varieties of capitalism: The institutional foundations of comparative advantage. Oxford University Press, USA.
Kanani A., & Larizza M. (2021, April 13). Institutions matter for growth and prosperity today more than ever. World Bank Blogs. https://blogs.worldbank.org/governance/institutions-matter-growth-and-prosperity-today-more-ever
Marrie, B. V., Andreas E., Renato F., Samuels G., Porto, G. A., Petersen T., & Thomas R. (2014). Brazil and Germany: A 21st-Century relationship. Opportunities in trade, investment, and finance. Archive of European Integration. https://aei.pitt.edu/74071/
Maslow, J. (2022, May 31). Top 10 countries with the best legal systems around the world. LegalScoops. https://www.legalscoops.com/top-10-countries-with-best-legal-systems-around-the-world/
Mueller H. (2022, March 17). The corporate governance review. The Law Reviews. https://thelawreviews.co.uk/title/the-corporate-governance-review/germany
OECD. (2022). Trade union dataset. OECD Statistics. https://stats.oecd.org/Index.aspx?DataSetCode=TUD
Rodirk, D., & Subramanian, A. (2003). The primacy of institutions:(and what this does and does not mean). Finance & Development, 40(2): 31-34. https://www.elibrary.imf.org/view/journals/022/0040/002/article-A010-en.xml
Sachs, J. D. (2003). Institutions matter, but not for everything. Finance & Development, 40(2): 38-41. https://www.elibrary.imf.org/view/journals/022/0040/002/article-A012-en.xml
Silva, M., & Lopes, J. C. (2020). Germany as a role model for structural adjustment of peripheral Eurozone economies: the Portuguese case. Instituto Superior de Economia e Gestão – REM Working paper nº 0143 – 2020. https://www.repository.utl.pt/handle/10400.5/20404
Silva, M. V., & Lopes, J. C. (2021). Varieties of capitalism, growth regimes, and structural change in Eurozone core and peripheral countries: Germany as a role model for Portugal? International Journal of Political Economy, 50(4), 272-291. https://doi.org/10.1080/08911916.2021.2001249
Terry, P. C. (2015). Judicial independence in Germany. Law and the World, (2), 33-36.
write