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Europe: Eastern Germany's Big Brother Still Bleeds Money

  • Breffni O'Rourke

Prague, 10 September 1997 (RFE/RL) -- Seven years after national unification, the mighty economy of western Germany remains chained to the rock of a depressed eastern Germany.

Statistics tell the story: since unification in October 1990, some one trillion marks has flowed into the effort to revitalise former communist eastern Germany. The federal budget alone this year allocates 128 billion marks to the east. But productivity of workers there is only 60 percent of the level in the west; unemployment in the east is over 18 percent, that of the western part about just under 10 percent -- totals which are unprecedented since the rise of Hitler.

The western German effort to help the former East Germany back on its feet must rank as one of major rehabilitation efforts of all time. On face value, it has creamed off much wealth from the donors, but left the recipients still struggling. What went wrong? And what are the lessons for other former socialist countries who do not have a big brother?

Certainly the difficulties of rebuilding were initially underestimated, not least by Chancellor Helmut Kohl, who once rashly pledged westerners they would not suffer financially. Eastern German infrastructure and industry was soon revealed as far worse than anyone had guessed, particularly as they had often been portrayed as a model of socialist progress.

But Bonn set to work with zest, and in seven years eastern Germany has received one of the world's most modern infrastructures: 11,000 kilometers of autobahns have been built or modernised, telecommunications have been switched to fibre optics and digitalised, five million new phones installed, railways vastly upgraded.

So the physical framework for economic take-off is there. But people of course are not machines, and don't respond automatically. Dr Udo Ludwig of the Institute for Economic Research in Halle told RFE/RL yesterday that the east's high unemployment figure comprises two distinct groups. Those wanting and able to work within the market system, and those -- particularly older people -- who have not coped with the radical change from central planning. This group will probably never work again, and thus will continue to inflate eastern jobless figures. Ludwig says that even in younger people, the mentality for private enterprise on their own initiative is broadly lacking.

Another expert, Dr. Willy Leibfritz, of the Institute for Economic Research in Munich, says the eastern economy was confronted with great initial shocks which have made recovery difficult. One was the sudden introduction as currency of the strong West German mark; the other was to quickly raise wages towards West German levels. Both these political moves spelled disaster for eastern enterprises. Deprived of cheap labour and competitive product pricing, they were utterly unable to compete with outside firms. Although worker productivity in the east has doubled to about 60 percent of the western level, wages have risen to between 70 and 85 per cent of the west level -- an unsustainable ratio. Leibfritz notes it's essential that productivity gains match or exceed wage increases, so as to provide resources for export-led investment.

He says that therefore, eastern Germany has in some ways had a harder time than say Poland or the Czech Republic, which have not had a big brother showering untold wealth upon them.

The other former communist states have not suffered at one stroke the loss of competitiveness though spectacular currency appreciation and wage increases. Difficult as their transitions are, they have had more room to manoeuvre.

Leibfritz says eastern Germany provides another valuable lesson for the other transition countries, namely the need for balanced and diverse progress across all economic sectors. Many eastern German jobs have come from new factories built by big companies like Siemens and Mercedes Benz. The small-to-middle business sector was doing well mainly because of the building industry boom, and when that boom subsided, the middle sector also suffered heavily.

Beyond economics however, in human terms the eastern Germans have gained greatly from the extension to them of the well-developed West German social security net. While Polish pensioners must struggle, legions of eastern Germans are able to glide comfortably into retirement, or into long-term unemployment. Leibfritz and Ludwig both note that much government expenditure has been made to meet these social goals, and has not been applied to the economic sector.

The experts say that getting eastern Germany to stand on its own feet won't be easy. Germany as a whole, which is widely seen to have lost its competitive edge globally, is recovering from recession only slowly in the present sluggish world economy. The eastern sector will need to work harder to justify the effort lavished upon it.