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Wirtschaftswunder ? V East Germany The New Wirtschaftswunder? Donogh McDonald and Gi.inther Thumann Introduction The regional imbalances that characterize many ad­ in west Getmany; it is assumed that labor productivity vanced industrial economies have long frustrated eco­ in west Germany will increase at about 2V2 percent a year nomic policymakers. The large gaps in our understanding or cumulatively by close to one third between 1990 and of these imbalances prompt the question: Will the evo­ 200P lution of the east German economy over the next decade To provide some perspective on the present size of the reveal a new economic miracle-Wirtschajiswunder-or productivity gap, Table I contains information on produc­ the emergence of another regional problem within the tivity differences between regions of the Federal Republic European Community? On the one hand, the saving of Germany (FRG) in 1987.3 The Lander in the FRG are surplus in west Germany provides a large pool of arranged into three groups, ranked according to output per resources from which the investment needs of east capita and productivity levels. The third ranked group Germany can be financed. Moreover, the tradition of (comprising Rhineland-Palatinatc, Lower Saxony, and enterprise in the eastern part of the country was strong Schleswig-Holstein), which had a population of some before World War IJ and it may be possible to revive 13 million in 1987, had an average productivity level about this tradition quickly. despite its long suppression by the 13 percent below that of the FRG as a whole and 18 percent system of central planning. On the other hand, given the below that in the other eight Lander. present dearth of capital in east Germany, it will be some Against this background. two scenarios for east Germany time before west German wage levels can be supported are illustrated (see Chart 1).4 In scenario A rapid growth in the east without large-scale subsidies or substantial boosts productivity levels in east Germany to 80 percent of unemployment. This creates obvious tensions. While a the west German level by the year 200 I. Unemployment slow closing of the earnings gap might result in a is initially high-one fourth of the labor force in 1991- migration of the most skilled to the west, a premature bur falls rapidly and by the end of the scenario is at about narrowing of the gap could well discourage investment: the same level (6 percent) as in the baseline scenario for either might endanger the process of economic recovery west Germany . The investment needs in this scenario are in the east. large: ln 1991-92 gross investment averages DM 110 billion To highlight some of these issues, this chapter presents a year (43 percent of GDP).5 This invesrment is financed scenarios for east Germany during the first I I years of entirely by external resources (i.e., resources from outside unification ( 1991-200 I) under alternative assumptions east Germany, including fiscal transfers from west Ger­ as to how quickly the productivity gap between east and many); indeed, external resources amounr to about 150 per­ west Germany is nan·owed.1 The scenarios take as their cent of net investment. Over the period 1991-200 I as a starting point a profile of the economic situation in east whole, total net investment is of the order of DM IV" Germany in the second half of 1990, incorporating official trillion, equivalent to two thirds of west Germany's net fiscal projections and the assumption that, immediately national product in 1990, with three fourths of this net prior to German economic. monetary , and social union investment financed from outside east Germany. 6 The (GEMSU), underlying labor productivity in the east was about 30 percent of the level in west Germany. The 2 Further details of the underlying assumptions arc given in Chapter IV. section on ..Supply Conditions in West Gcnnany:· growth rates required in the east to narrow the productivity ' Of course. to the extent that these productivity differences were gap over the next decade depend not only on the size of due to structural weaknesses in the poorer Uinder. they renected the initial gap but also on the increase in labor productivity problems one might hope to avoid in restructuring the east Gennan economy. • The model used is described in the follow ing section . � All deutsche mark ligures are in terms of 1990 prices. Unle�� ' The duration of the simulation wa> chosen to allow ten yeasr of otherwise indicated . all ratios to GDP relate to GDP in east Germany. investment to inlluencc the terminal productivity level. Investment in '' The calculation of the investment needs to reach a relative 200l is assumed to have no innuence on productivity in 200 l. prod uctivity level of 80 percent by 200 l reported in Chapter IV was 78 ©International Monetary Fund. Not for Redistribution Introduction Table I. Federal Republic of Germany: Regional Profile of Output and Employment, 1987 Output Output Unemployment per per GDP Population' Employment ' Rate' Capita Worker (In billions of deursche mark) (In millions) (In percenT) (FRG = 100) Hamburg 91.7 1.6 0.7 11.6 175 178 Brcmen 27.5 0.7 0.3 12.8 1 27 135 Berlin ( Wesll 76.2 2.0 0.9 9.2 115 110 Hcssc 203.4 5.5 2.5 5.7 112 109 B;u.Jcn· WurHembcrg 322.5 9.3 4.4 4.6 106 99 Bav<tria 361.3 1 0.9 5.1 5. 1 101 95 North Rhine· Westphalia 524.4 16.7 6.9 8.8 95 101 Saarland 30.2 1.1 0.4 11.2 87 98 Rhineland-Palatinate 1 05.7 3.6 1.6 6.7 89 90 L<JWCr Saxony 196.1 7.2 3.0 8.7 83 86 Schleswig·Holstein 70.1 2.6 1.1 8.8 83 84 Total 2009 .1 61.1 26.9 7.2 100 100 Top four Liinder 398.8 9.8 4.4 7.9 124 122 Middle four Liinder 1238.4 38.0 16.8 6.7 99 99 Bottom three Liinder 37 1 .9 13.3 5.7 !U 85 87 Source: Statistisches Bundesanu. Srmisrisches Jahrbuch. 1989. ' Population and labor market dal:l as of May 25. 1987. declining recourse to external saving over time reflects, in scenario the primary fiscal deficit in east Germany is of the part, falling investment requirements in relation to output, order of 9 percent of GDP. Larger accumulated deficits but, more important, a rising saving rate. Private saving also increase interest payments.� Given these fiscal devel­ increases, but the principal source of the stronger external opments, the imbalance in the external accounts throughout position is the improvement in the government accounts. the scenario is also much larger than in scenario A. The general government deficit in the east is initially very Scenarios A and B are discussed in greater detail in the large (50 percent of GDP in 1991), principally on account following sections. In interpreting these scenarios. one of substantial government dissaving. Over time, the deficit should bear in mind the uncertainties surrounding the initial drops steadily. with a small overall deficit and a primary conditions in east Germany, the likely response of fo reign budget surplus by the end of the scenario. 7 investors, prospective migration patterns. the ability of east Scenario 8 is less optimistic, with productivity in 2001 Germany to absorb large-scale investment (particularly in only 60 percent of that in west Germany and migration the initial years of GEMSU), the policy and institutional from east to west occurring on a much larger scale. The framework, and the behavior of economic agents. Moreover. weaker economic performance results from lower invest­ as noted above, there are large gaps in our knowledge of ment and a slower reduction of inefficiencies in the use of the factors that promote rapid growth in some less developed labor and capital. Net investment in 1991-92 is only regions but allow others to languish alongside rich neigh­ 60 percent of that in scenario A, and this relative weakness bors. Thus, it is important to look at scenarios A and B of investment persists throughout the scenario as the initial not as projections but as providing a consistent framework hesitancy of investors is reinforced by aggressive wage within which issues related to GEMSU can be explicitly demands and by ingrained structural weaknesses in the examined. Some of these issues are brought up as details economy. The fiscal imbalance declines more slowly than of the scenarios are presented, with a more wide-ranging in scenario A as low growth restrains revenue and boosts discussion following in lhe final section of the chapter. social expenditure relative to GDP; by the end of the While the two illustrative scenarios produce what are in many respects quite different outlooks, a common feature lower a� it did not include investment in the year 2001. The share is that they both imply rapid growth rates; in scenario A, financed by external resources is sensitive to the assumption on fiscal output grows at a rate of I 01/2 percent a year and labor transfers from west Germany. In this chapter. it is assumed that fiscal productivity at a rate of 11 percent, while in scenario B transfers cover government dissaving in the east. See footnote 26 for Y2 further discussion. 1 For analytical purposes. fiscal operations in east Germany have been separated from those in west Germany. lt is also assumed that • Given the assumption on fiscal transfer� from west Germany. there arc no changes in tax rates or in the rules governingthe operations larger interest payments resulting from greater government dissaving of the social insurance funds.
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