Economic Aspects of German Unification: Expectations, Transition Dynamics and International Perspectives

536 Pages·1996·31.834 MB·English

by  Paul J. J. Welfens (auth.), Professor Dr. Paul J. J. Welfens (eds.)

Economic Aspects
of German Unification
Springer
Berlin
Heidelberg
New York
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Budapest
Hong Kong
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Milan
Paris
Santa Clara
Singapore
Tokyo
J. J.
Paul Welfens (Ed.)
Economic Aspects
of German Unification
Expectations, Transition Dynamics
and International Perspectives
Second, Revised and Enlarged Edition
With 34 Figures
and 110 Tables
Springer
Professor Dr. Paul J. J. Welfens
University of Potsdam
Wirtschafts-und Sozialwissenschaftliche Fakultat
Lehrstuhl WirtschaftspolitikJIntemationale Wirtschaftsbeziehungen
August-Bebel-StraBe 89
D-I4482 Potsdam, Germany
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Economic aspects oC German unification: expectations,
transition dynamics and international perspectives; with 110
tables IPauJ J. J. Welfens (ed.). - 2. ed. - Berlin; Heidelberg;
New York; Barcelona; Budapest; Hong Kong; London;
Milan; Paris; Santa Clara; Singapore; Tokyo: Springer, 1996
ISBN-13:978-3-642-79974-7
NE: Welfens, Paul J. J. [Hng.]
ISBN -13: 978-3-642-79974 -7 e-ISBN -13: 978-3-642-79972-3
DOl: 10.1007/978-3-642-79972-3
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PREFACE TO THE SECOND EDITION
Paul J.J. Welfens
The editor is pleased to present a second edition of Economic Aspects of German Unification
which includes new chapters and several postscripts. Almost five years after unification output
in the ex-GDR is back to its 1989 level. Due to a massive intra-German resource transfer
consumption per capita in eastern Germany has not fallen as much as output and employment
which reduced by one-fifth within three years. Given high West German transfers which
represented about 5% of West German GDP and more than 50% of East German GDP the fall
of industrial output could have been much stronger than had politically been feasible. Hence
structural change necessary for productivity growth was dramatic in the ex-GDR where the
goods producing sector (manufacturing, mining, energy and construction) strongly changed its
proportions; within four years construction almost doubled, and the share of investment goods
production reduced by 10 percentage points between 1990 and 1994 and is· now down to
21.1 %. Mining lost two-thirds of its share in the producing sector which itself was reduced
relative to GDP. The share of the services industry increased by 5 percentage points between
1991 and 1994, but with a share of 27.7% in East Germany's GDP it was still about 9
percentage points lower than in western Germany. By contrast, government accounted for
20.9% of GDP in eastern Germany, but for only 13.2% in western Germany. East Germany's
labor productivity stood at 29% of western levels in 1989 but will reach about 55% by end-
1995 which is a remarkable achievement. Some firms in eastern Germany are even more
modern than plants in western Germany; the vintage effect of high investment output ratios in
eastern Germany is woxking in favor of the ex-GDR in the long term. This second edition
includes new papers with a focus on structural change by HEILEMANN and LOBBE as well
as by WEGNER; the analysis points to deficits in economic theory with its emphasis on the
macro view. The restructuring of the GDR economy within a compressed time frame shows in
a nutshell the transformation problems faced by former socialist countries.
Economic growth rates of 7-10 % are feasible in the 1990s in eastern Germany which should
help to achieve income parity within Germany within about 15 years. It will take much longer
before per capita wealth figures are converging in eastern and western Germany - indeed one
may assume that a large wealth gap will remain for decades as many industrial properties and
housing stocks have been reclaimed by people from West Germany, including former East
Germans who left the GDR during the 40 years of its existence. The restitution of property has
created uncertainty and this and the new unemployment risk offset part of the real income gain
which is occurring in the course of the transition to a market economy.
There are major economic divergences within eastern Germany where five new Lander (states)
were restored; Thuringia and Saxony could become new economic gravity centers in eastern
Germany as they benefit from historical economic strengths and traditions while the regional
governments are actively promoting new industries and subsidizing high technology
VI
investment. The relatively poor state of Brandenburg is expected to merge with the affluent
East Berlin/West Berlin which could create an interesting precedent for western Germany's
states, too. One cannot overlook that economic divergences are considerable within Berlin and
within the whole of Germany. This fact and social conflicts could endanger the stability of
Germany. In this situation intragovernmental transfers are particularly important. HENKE,
LUTZ and ADE analyze the system of transfers within Germany.
The new Germany could be an economic powerhouse in Europe. However, the united
Germany faces major internal and international challenges. While price stability has been
regained in 1995 - after a short inflationary development in 1992/93 - unemployment remains
a major problem; indeed it will be difficult to remedy while there is an ongoing real
appreciation of the DM which is in contrast to a decade of a gradual real depreciation in the
period 1979-89 in the European Monetary System. The real DM appreciation also reduces
inflows of foreign direct investment such that the overall investment output ratio might decline
and offset positive growth effects associated with economies of scale in Germany's
nontradables industries. While Germany's influence in economic terms is rising in the EU-15
club there is a relative decline of German and French political power in the EU. It also is
unclear which concept the EU and Germany, respectively, will envisage with respect to the
eastern enlargement of the EU. WELFENS looks into internal and international problems.
German economic unification shows that massive transfers, radical structural change and
modernization of the capital stock quickly can achieve convergence - a strategy which is quite
difficult to follow in eastern Europe. It is doubtful that the EU will enjoy sustained prosperity
if eastern Europe cannot be reintegrated into Europe and if Russia/the Ukraine cannot be
stabilized. To the same extent th~t socialist statistics created an illusion of economic well-being
in eastern Europe and the USSR, there is an underestimation of the difficulties to switch to a
market economy in a country in which there is no historical memory of the market economy
left. Fifty years of an expanded military industrial complex in the USSR are more difficult to
reverse than six years (1939-45) of transitory dominance of the military in Germany's private
industry which quickly reoriented itself towards civilian and international markets in the FRG
after 1945. These internationalized firms have largely taken over the industry in the ex-GDR
where the old elites faced such a sharp shock of currency appreciation and competition that
they are unlikely to keep much more than nominal power in industry and government. In the
ex-GDR one can already hear Communist nostalgia which argues that it was not really so bad
in the GDR; intellectual enlightenment would be needed to correct this biased picture of the
GDR which achieved modest economic growth rates by coercion, enormous environmental
destruction at the expense of future generations and strict limits on liberty and an omnipotent
secret service. German unification offers many insights for international comparisons and is
important for international relations and systemic transformation.
Potsdam and Munster, March 1995 Paul J.J. Welfens
PREFACE
Robert G. Livingston
Germany's "monetary, economic, and social union" was proclaimed on July 1, 1990 - a
decisive step that brought together the liberal, social market economy of West Germany and
the centrally planned, communist one of East Germany, the German Democratic Republic.
From that day onwards there was no turning back from German unification, and constitutional
union followed shortly thereafter, on October 3, 1990.
In truth, however, the union of July 1 was a monetary one only. That was the fait accompli.
The West German D-Mark became the official medium of exchange in the GDR. The process
of economic and social unification, however, only started to begin. Completing that process,
not to speak of political, societal, psychological, and cultural unification, will take many
years.
Many of the difficulties that Germany will face in uniting economically became evident
quickly in the summer and fall of 1990. Professor Paul J. J. Welfens, who was at that time the
John J. McCloy Distinguished Research Fellow in residence at the Institute, foresaw some of
these problems and convinced us that the Institute should bring together outstanding
economists to analyze them for a wider public.
Professor Welfens succeeded in interesting a broad range of academic scholars, international
civil servants, and researchers from business firms and banks to address what were then a
completely new set of unanalyzed, even unanticipated, exciting, and important issues. He
convened the Institute's conference November 13-14, 1990, less than five months after
monetary union. It was held at the University's Paul H. Nitze School of Advanced
International Studies, which provided welcome logistical support.
The chapters in this study are the product of the presentations and commentary at that
conference. They deal with a range of macroeconomic, microeconomic, national, and
international challenges, the dimensions of which have since last November become much
more widely recognized. Both the conference and this volume are the product of Professor
Welfens's insightful, tireless, and detailed efforts.
VIII
The Institute is deeply grateful to Professor Welfens and to the authors and commentators
whose work appears in this volume. We are proud to accord it a place in our publication
series. Our appreciation is due also to the John M. Olin Foundation, which funds the McCloy
fellowship, as well as to the several generous supporters of the conference on "The Economic
Aspects of German Unification:" The Dresdner Bank AG, the Lynde and Harry Bradley
Foundation, Lufthansa German Airlines, Morgan Guaranty Trust Company, the Representative
of German Industry and Trade in Washington, D.C., the Siemens Corporation, and the Fritz
Thyssen Foundation.
Robert Gerald Livingston
Director, American Institute/or Contemporary German Studies, The Johns Hopldns University
Washington, D.C., July 1991
TABLE OF CONTENTS
Preface to the Second Edition
Paul J.J. Welfens V
Preface
Robert G. Livingston, Director of the American Institute for Contemporary German
Studies at the Johns Hopkins University VII
Introduction: Economic Aspects of German Unification
Paul J.J. We(fens 1
I. STRUCTURAL AND MACROECONOMIC CHANGES
A. The Structural Renewal of Eastern Germany: Some Initial Observations
Ullrich Heilemann, Klaus Lobbe 9
1. Introduction: Why Structural Analysis of the East German Economy? 9
2. Determinants of Structural Development 11
2.1 The Economic Policy Framework 11
2.2 The Factors of Production and their Prices 13
3. Structural Changes in the Eastern German Economy 14
3.1 Industrial Structures 14
3.1.1 Production 14
3.1.2 Factor Input 16
3.1. 3 Agriculture 18
3.1.4 Small and Medium-Sized Enterprises 19
3.1.5 Production and Employment Structures 21
3.1.6 Economic Structures in East and West Germany -a First Appraisal 24
4. Conclusions 25
B. Integrating the East German States into the German Economy: Opportunities,
Burdens and Options
Lutz Hoffmann 39
1. Introduction 39
2. The Currency Union: Its Genesis and Impact 40
3. Pattern and Extent of Structural Adjustment Needed 45
4. The Starting Position of Individual Industries 50
5. Reconstructing the Capital Stock 53
6. Structural Adjustment Policy 54
7. The Financial Burden on the Public Sector 58
8. Concluding Remarks 59
9. Postscriptum: East Germany in Transition 61
9.1 Macro-Economic Imbalance 62
9.2 Structural Adjustment 64
9.3 External Trade 70
9.4 Employment and Growth Potential 71
x
c.
Sectoral Shocks and Structural Adjustment in the East German
Transformation Process
Manfred Wegner 77
1. Unification Concept and Transformation Shocks 77
2. Past Macroeconomic and Sectoral Performance 78
2.1 Production and Employment Trends 78
2.2 Manufacturing 81
2.3 Small Businesses 84
2.4 Services 85
3. Investment and Labor Productivity 85
3.1 Investment Activities 85
3.2 Labor Productivity 88
4. Regional Developments 89
5. Policy Orientation and Growth Prospects 92
6. Conclusions 95
D. Intergovernmental Fiscal Relations after German Unification:
Problems and Solutions
Klaus-Dirk Henke, Peter Lutz, Claudia Ade 99
1. Introduction 99
2. Basic Elements of the System of Intergovernmental Fiscal Relations in Germany 100
2.1 The Distribution of Public Functions between Levels of Government 100
2.2 The Structure of Public Revenues 102
2.3 Primary and Secondary Distribution of Taxes: An Overview 102
2.4 The Vertical Assignment of Tax-Revenues 106
2.5 Horizontal Allotment of Local Tax Returns 109
2.6 Fiscal Equalization Among Lander 111
2.6.1 Horizontal Turnover Tax Distribution 111
2.6.2 The Fiscal Equalization Among Lander 112
2.6.3 The Federal Supplementary Grants and Other Elements of the System
of Intergovernmental Fiscal Relations 116
3. Interim Regulations for Unified Germany and their Necessity 117
3.1 The Political and Economic Framework after Unification: The Development
1990-1994 117
3.1.1 The Situation in East Germany 117
3.1.2 The Situation in West Germany 119
3.1.3 The Necessity for Interim Regulations 122
3.2 Interim Regulations for the New Lander until 1994 124
3.2.1 Separated Turnover Tax Distribution 124
3.2.2 A Separated Fiscal Equalization System Among Under 124
3.2.3 The German Unity Fund 125
4. Long-Term Solutions for Newly Formed Germany: The Federal Consolidation
Program and Subsequent Measures 127
4.1 Overview 127
4.2 Changes in the Turnover Tax Distribution 127
4.3 Changes in the Horizontal Fiscal Equalization System Among Under 128
4.4 New Functions for the Federal Supplementary Grants and the Financial Aids 129
4.5 Financing the New Regulations 130
5. Conclusion 132