A German bid for efficiency

EBay thrives all over the world. Just about everybody likes the idea of getting a Chanel skirt or a rare coin for a snip. And just about everybody enjoys the suspense of an auction, especially via a new medium.

But the online auction and flea market site is especially successful in Germany. EBay.de, the German site, attracted 12m unique visitors in December 2002, compared with 5m for the UK and fewer than 2m for France. In the last quarter of 2002, eBay.de, based just outside Berlin, produced turnover of more than $1bn, four times more than the same period a year earlier. If the rest of its economy were growing like that, Germany would again be the world's Wunderkind.

The success of eBay illustrates both the achievements of the German economy and the limits that regulation and taxation place on future growth.

On the surface, what eBay says about Germany is good. Germans are avid hobbyists; the fact that they can afford to make a new hobby of shopping for their hobby is a tribute to the nation's wealth. Successful use of eBay demands a high level of education, which the Germans have despite their recent agonising. EBay operates well in cultures that have a high level of trust and a low level of fraud. Germany has both. Users therefore can bid on a digital camera (one sold every 90 seconds) or piece of clothing (one sold every 3 seconds) with relative confidence that the other partner in the transaction, that stranger in Würzburg, will deliver the goods.

But eBay also illuminates the negative traits. The online auction house has won plaudits for its accessibility. Everything from clothes to soap to car parts is available and it is genuinely user-friendly. How different from the typical German shop, with its small inventory and grumpy staff. Restrictive opening hours keep most bricks-and-mortar stores shut on Saturday afternoons and all Sunday. On eBay, however, Germans can shop 24 hours a day, seven days a week. While the company does not quantify its night or weekend transactions separately, it acknowledges they are heavy. This is evidence that the store-hour system is killing growth.

But the greater problem, and one that fuels eBay, is heavy taxation. The combination of 16 per cent value added tax with high income taxes and the high costs of employment make store-bought goods and services relatively expensive for most Germans. Government data show the average German must work 5.5 hours to generate enough after-tax cash to pay a craftsman for one hour's work on his house. As a result, Germany's underground economy is a large one, worth 16 per cent of gross domestic product.

The casual shopper or the one-time seller can get round this taxation by shopping on eBay. Professional traders are supposed, at least in theory, to collect value added or sales tax. But amateur transactions are not subject to tax.

It is not just the absence of value added tax that makes the service such a hit. "Winning" an item on eBay takes time - sometimes an hour or two. This is longer than many shoppers in western countries care to spend. Yet if the only way to get something is to haggle for it, they will do so.

Coincidence, of course, does not necessarily prove causality. But there is other evidence that an aversion to regulation and taxes drives consumer preference. One is the age-old low-technology flea market, an institution on the German town square. Another is the heavy presence in Germany of the furniture giant Ikea. Ikea's website even brags that it has managed to get round store-hour rules: "Cologne is closed," it reads, "Bonn is closed. Ikea is open!" Tax is a factor here, too. Ikea enables its large white-collar clientele to avoid the cost of hefty labour taxes. What else would motivate maladroit professors to buy mediocre furniture requiring complicated self-assembly? Do they really enjoying spending their Sunday afternoons grappling with an Allen key?

Businesses such as eBay are evidence of the efficiency that the internet has generated. But eBay's success in Germany is also evidence of inefficiency. David Ricardo's rule of comparative advantage - which says that nations should make what they make best - also applies to individuals. Growth is prevented when big brains find it more profitable to potter online than to concentrate on their area of expertise.

In the corridors of power, half an hour way from eBay's headquarters, this problem goes unnoticed. Deficit or not, what the success of eBay shows is that Germany is already taxed enough.

The writer is on leave from the Financial Times as a fellow at the American Academy in Berlin

© Copyright 2003 Financial Times

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