Slowly -- and not so surely -- East Germany tries capitalism

Robert Kuttner

December 06, 1990|By Robert Kuttner

Berlin

THE ECONOMIC reconstruction of East Germany has proved far trickier and more expensive than the Kohl government first imagined. And while political unification helps, it can be a hindrance.

To begin with, most East German enterprises operate at such a low level of productivity that they are simply not competitive with their West German counterparts, no matter how low the wages. As soon as the two economies were linked, East German consumers simply deserted locally produced goods for West German brand names. "Some of our products weren't so bad," one East German told me. "But no one will buy them."

This, of course, creates escalating unemployment in the east. As local enterprises collapse for lack of markets, a growing fraction of the population is either outright unemployed, or on "short-time." As the local economy is exposed to the full force of market competition, this will only worsen.

For example, the East German Zeiss company, a venerable German name in optics, makes a presentable camera -- the Praktica -- which had some buyers, even in the West. The cameras are price-competitive at about 200 marks. The only problem is that they cost 500 marks to make.

In the recent past, Zeiss has sold about 70 percent of its output to other East Bloc countries. But as the rest of Eastern Europe is also exposed to market forces, these sales will end. Zeiss is the economic mainstay of the East German city of Jena, where some 15,000 workers will be laid off.

Chancellor Kohl's government is spending about 100 billion marks this year (about $70 billion) on subsidies to East Germany. But in line with the government's free-market principles, these subsidies are going for such uses as public infrastructure, pensions, social aid, unemployment compensation and public administration. The government is relying on private capital to rebuild East German industry. Unfortunately, West German private industry is moving fairly slowly, picking off the few jewels that are potentially competitive.

The Bonn government's Treuhandgesellshaft, or trusteeship body, is the nominal owner of formerly state-run East German enterprises. It is conducting a triage operation, determining which ones are hopeless, which ones are competitive and which might make it only with substantial infusions of Western capital. Almost all are at best in the third category.

Some 200,000 new small enterprises have sprung up in the east. But a large fraction of them appear to be people selling cigarettes and soft drinks on street corners. Nearly all of East Germany's shops today are mainly outlets for West German goods.

Another legacy of communist rule -- horrible pollution -- adds a further disincentive to Western private investment. Cross into the former German Democratic Republic (East Germany), and the air quality is instantly degraded. The dominant form of home heating is soft coal. Industrial sites are pollution pits. It is simply not cost-effective for a Western company to set up shop in many industrial locations without government help to clean up pollution.

The question of what wages to pay East German workers also presents a dilemma. East Germany's main attraction is cheap labor. But as the country becomes one market, the cost of living goes up in the East. That means the traditional East German wage, about one-third of that in the west, becomes a pauper's wage. But for now, East German productivity doesn't justify a higher wage. However, if East German workers are not paid better wages, there will be the mass migration to the west. Unofficial statistics suggest that over 100,000 East Germans migrated westward after unification.

The Kohl government may have embarked on an expensive policy failure. In order to lubricate economic unification and buy political support in the east, the government agreed to allow every East German to exchange 4,000 east marks for West German marks at a ratio of one-to-one. An unlimited quantity of east marks could be exchanged at two-for-one. At the time, the unofficial street-exchange rate was six or seven to one.

With little to buy, many East Germans had accumulated substantial savings in relatively worthless east marks. By printing up billions of marks worth of hard currency for the East Germans, the Kohl government underwrote a one-time spending spree.

The real East German economy is expected to shrink by 15 to 30 percent. The government, in effect, has financed a short-term welfare economy in the east, when what the east really needs is investment and retraining of its work force.

Many German economic experts now believe that Germany will require a massive tax increase after Sunday's elections, in order to finance the recapitalization of East Germany. Otherwise, the eastern part of the country could become a permanent economic ward.

These problems will take decades to resolve, and they won't be cheap. In the meantime, economic dislocation is likely to breed social and political instability. It would be dreadfully ironic if the Soviet satellites were liberated from the worst brand of socialism, only to encounter the worst face of capitalism.

Robert Kuttner writes regularly on economic matters.

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