Which country will collapse economically first?

Long ways of German unity

Bernd Martens

Dr. habil. Bernd Martens, studied sociology, computer science, social history and economics in Hamburg. From 2001-12 he worked at the Collaborative Research Center 580 "Social developments after the system upheaval" at the University of Jena in a research project on economic elites in enlarged Europe and as a scientific director. From 2013 to 2017 he worked at the Center for Social Research at the University of Halle in various research and evaluation projects. From 2018 to 2019 he worked at the DZHW (German Center for University and Science Research) Berlin in the Nacaps project. Since 2020 he has been working in the Leipzig branch of the DZHW. (Nacaps stands for National Academics Panel Study and is a longitudinal study by the DZHW on doctoral candidates and doctoral candidates in Germany. Nacaps regularly surveys doctoral candidates nationwide about their doctoral requirements, career intentions and career paths, as well as their general living conditions.)

Low productivity, outdated plants, collapse of the markets: The starting position of East German companies was bad when they had to face global competition "overnight" with the monetary union. The result: shock therapy for the economy.

The large coking plant in Lauchhammer was demolished in 1992. Two years after reunification, industrial production in East Germany was 73 percent below its 1989 level. (& Copy picture-alliance, Paul Glaser)

Facts

The transformation of the planned economy into a market economy was accompanied by hopes that soon turned out to be illusory. Originally it was assumed that reunification and the restructuring of the East German economy would mutually reinforce one another. These expectations were not fulfilled. Instead, the political integration of the two states was followed by the economic collapse in East Germany.
Economic collapse and new beginning after 1990 ( Graphic for download). License: cc by-nc-nd / 3.0 / de / (bpb)

Handling of the planned economy and adjustment crisis

A dramatic change is reflected in the employment structures of East and West German industry before and after the fall of the Wall: the development of the GDR planned economy and the introduction of market economy principles. Within two years, large companies shrank mainly to small and medium-sized companies - if they still existed at all. The sober and abstract figures conceal the effects of a profound economic and social adjustment crisis, which, in terms of its impact on the East German population, can only be compared with the global economic crisis of the 1930s. The economic historian Philipp Ther (2014, p. 97) chooses a different comparison. In a European context, the economic slump in East Germany can only be compared with the situation in Bosnia and Herzegovina in the 1990s. But there was a civil war there at the time.

The end of the combines

In the 1980s, most of the employees in the GDR worked in large companies with more than 1,000 employees. In the industrial sector, the proportion of people in large companies was roughly twice as high as in Germany (75.7 percent compared with 39.3 percent). This was due to the economic structure in the GDR, in which large combines held a dominant position. Since 1978 these combines - similar to western corporations - had emerged as company associations, here state-owned companies (VEB). This was linked to the hope that the companies within an industry could work more effectively (Steiner 1999).

In 1989 there were 173 centrally managed combines and another 259 that were managed at the level of the GDR districts. Political attempts to maintain these structures in a unified Germany failed early on. By June 1990 around 200 combines had dissolved themselves and the VEB had been converted into stock corporations or limited liability companies. On July 1, 1990, the Treuhandanstalt (THA) began its work to privatize publicly owned assets. The combines were first broken down into individual operations. This was done in order to separate viable companies from unprofitable parts of the business. In a second step, the large companies were reduced to small or medium-sized companies by laying off parts of the workforce in order to make them interesting for potential buyers at all.

Based on the final balance of the THA, it was unsuccessful in the sale. Until its self-dissolution in 1994, the THA had made losses of 256 billion DM. This corresponds to an average deficit for each company sold of DM 17 million (Windolf 2001, p. 399). There are different reasons for this failure. But the decisive factor seem to have been the economic and political framework under which the transformation of the East German economy took place. These conditions are not comparable to those of the other Eastern European transition countries.

Economic shock therapy in East Germany

There is agreement among economists and social scientists that privatization in East Germany, in contrast to all other former socialist countries, meant the strongest "shock therapy" for companies. The reason for this must be seen in the monetary union and in the course and consequences of reunification. With the entry into force of the monetary union, the export of GDR companies was placed on a new currency basis and thus a different assessment basis without a transition period. Until 1989, the GDR economy had been integrated into the overall economic planning of the Comecon countries in many ways. (Comecon = Council for Mutual Economic Aid, economic union of the socialist states.) This led to close trade relations between the Comecon countries. However, almost all foreign trade in Comecon was realized through real exchange. Less than 1 percent was based on convertible currencies (Ahrens 2000, p. 349). As a result of the monetary union, the Eastern European customers of Eastern German companies suddenly had to pay in foreign currency, which, however, was rare in all transition countries. Due to the monetary union, the East German companies had to face global competition almost "overnight" and completely unprepared.

As a result, the eastern trade of East German companies collapsed. Instead, West German and West European companies were able to take over growing shares of exports to Eastern European transition countries, because Eastern European trading partners were more willing to spend their foreign currency on "Western" products with an allegedly higher performance than those from Eastern Germany. Accordingly, between 1990 and 1993 exports from the former federal territory to Eastern Europe grew by 40 percent, while during this period East German exports to the same region shrank by 79 percent (Wirtschaftsatlas 1994, p. 50 f.). Philipp Ther (2014, p. 96) assumes that the currency comparison between Eastern Germany and the Czech Republic resulted in a cumulative appreciation of 1:12. That was unsustainable for the East German economy. "It fell behind the competition from the East and had no chance against West German industry."

In addition, monetary union and reunification meant that West German goods flooded the East German market unprotected. There were no options for foreclosure, for example to raise protective tariffs. At the same time, East German companies were immediately exposed to competition within the European Community's internal market. In West Germany all of this triggered a reunification boom. In East Germany, on the other hand, there was an extensive economic crisis. The East German companies lost their regional markets to the western competition at a point in time at which they could not even be present with their own products on foreign markets, since in the GDR trade with western countries was usually carried out centrally by state agencies had been regulated.

Due to the simultaneous massive occurrence of disadvantageous factors - currency union, collapse of traditional markets, reunification, unfamiliar competition, uncompetitive products and insufficient market development, as well as the legacy of the GDR economy, which continued to have an effect in low labor productivity, a holistic operational concept and outdated production facilities, among other things Companies in a situation threatening their very existence. In this situation, the parallel sales efforts of the THA were often not helpful.
The consequences of the economic shock therapy can be seen in the structural change in the East German economy. Two years after the fall of the Wall, only a minority of employees worked in large companies.
Economic collapse and new beginning after 1990 ( Graphic for download). License: cc by-nc-nd / 3.0 / de / (bpb)

However, this view only partially reflects the overall consequences of the economic upheaval, since it does not take into account the number of laid-off employees and company bankruptcies. These additional consequences of the system upheaval are illustrated by the slump in production in East Germany and the extent of "layoffs" in the early phase of economic transformation: two years after reunification, industrial production in East Germany was 73 percent below its 1989 level (Windolf 2001, p. 396). At the same time, employment in various sectors collapsed considerably, regardless of whether privatization was successful or unsuccessful. The economic sociologist Paul Windolf (2001, p. 411) estimates that between 1990 and 1995 around 80 percent of the working population in the GDR lost their jobs temporarily or permanently.

Regardless of how one categorically classifies the political end of the GDR, the transformation of its economic structures can best be described with the term "revolution". The consequences can still be felt today. They could only be controlled through the use of massive financial resources on the part of the federal government and the old federal states.

Literature:

Ahrens, R., Mutual Economic Aid? The GDR in Comecon - Structures and Trade Strategies 1963-1976, Cologne 2000.

Fritsch, M., Entrepreneurship, entry and performance of new busi¬ness compared in two growth regimes: East and West Germany, in: Journal of Evolutionary Economics 14 (2004), pp. 525-542.

Lutz, B./Grünert, H., The Decay of the Employment Structures of the GDR 1989-1993, in: Lutz, B. et al. (Ed.), Arbeit, Arbeitsmarkt und Betriebe, Opladen 1996, pp. 69-120.

Steiner, A., Between Promise to Consume and Compulsory Innovation On the economic decline of the GDR, in: Jarausch, K.H./

Sabrow, M. (Ed.), Path to Downfall. The internal disintegration of the GDR, Göttingen 1999, pp. 153-192.

Ther, Philipp, The New Order on the Old Continent: A History of Neoliberal Europe. Berlin 2014.

Windolf, P., The Economic Transformation. Political and economic system rationalities, in: Schluchter, W./Quint, P.E. (Ed.), Der Vereinigungsschock, Weilerswist 2001, pp. 392-413.

Economic Atlas of the New Federal States, Gotha 1994.