The View from Saxony -
Review and Outlook an Restructuring an Economy
Vortrag bei der Internationalen Konferenz "Germany Now"
im Royal Automobile Club, London
9. Juni 1994
This task has kept us busy for the last four years and l am delighted to give you a short review on our problems, achievements and prospects in this field.
Looking at the current state of the German economy from an economist's point of view - there is much relief and perhaps also a little surprise over the rather moderate way in which the shock and change of unification has been managed so far on the national scale.
Surely, no revolution comes about without victims. And there have been, spoken in economic and social terms many victims resulting from the economic break-down in East Germany as part of the political unification process .
In so far "The Economist"-magazine in its last month's survey of Germany was right, citing a Berlin professor of history, saying that "the transfer of the West German order to the East German economy has led to destruction and crisis."
The only thing the professor forgot to mention was, that destruction and crisis was unavoidable in the case of a bankrupt socialist industry, producing old fashioned goods with outdated machines in over-employed factories delivered to markets which disappeared soon as the whole socialist system broke down. Therefore destruction necessarily had to be the first step - in the very sense of Schumpeter's "creative destruction" if one wanted to turn crisis into chance for a new beginning.
There was no alternative to lifting the curtain from the "hidden" unemployment and to start a new broadly based investment process to produce modern goods with high tech equipment on a high productivity level for real and prospective markets.
This also meant: acceptance of an unemployment rate at high level for the time being. l feel that "The Economist"-magazine in its survey of Germany, overlooked this forward looking constructive part of the destruction process, and therefore came to the wrong conclusion that East Germany bad become Germany's "mezzogiorno" and would stay in this position for quite a long time.
My experience from working in the East German recovery programme for the last three years is, that it would be a mistake to just extend the negative side effects of the current restructuring process into the future. I am quite sure: We all will become witnesses of a time when East German suppliers, equipped with the most modern technologies and combined with their technical competence and motivation will outstrip many of their Western competitors.
Although the reasons for the break-down of East German industries were quite obvious, there have been accusations addressed to the West German politics' management, indeed, complaining that they may not have chosen the right strategies to cope with the transformation process. But was this really a fair argument?
In the figurative sense, the course of events of the German unification 1990 can only be compared with a meteoroid encounter. However, nobody is prepared for a meteoroid encounter. The treaty on the formation of an economic and currency union between the two German states as weIl as the following unification agreement, had to be worked out under pressure within few weeks. The legal experts were constantly encountering new fields for which there was no legal precedence.
One could always hear that there are whole libraries filled with books how to transform capitalism into socialism but there is not a single textbook on how to find a way back from socialism into the free market system.
There is an important time aspect behind this sarcasm: from the thirties to the nineties, i.e. for a period of 60 years, for two generations and throughout two dictatorships the people of East Germany had lived in law systems which fundamentally differ from the democratic and liberal constitutional state of Western character. Therefore, discrepancies in mentalities had emerged that could not be overcome at short notice.
That's why the first strategic steps that went far beyond the economico-political tasks included the following three essential aspects which needed considerable time to be dealt with:
Basically, the economico-political strategy of 'Aufschwung Ost' is aimed at a reduction of this structural unemployment as quickly as possible and at the same time at the building up of a modern economic structure.
In order to realize the depth of the break-down of the GDR economy we have to imagine the cumulative effect of the sudden changes on the domestic markets and on the export markets as well.
With the introduction of the economic and currency union the economy in East Germany was not only, overnight, exposed to the pressure of competition of one of the strongest economies worldwide.
The highly export-dependent Saxon economy also lost most of its traditional export markets in the former COMECON countries. The cost pressure developed by the revaluation of more than 300 % overnight was another important factor.
In the end, the reasons that led to the break-down of the economy are found in its loss of competitiveness caused by decades of socialist control.
The confidence to successfully achieve the transformation into a modern market economy lies in the advantages of the business location East Germany and especially Saxony.
A key factor for the recovery process is capital investment, both in volume and speed. The investment process, especially in the building sector, but also in infrastructural areas like roads and traffic, energy and telecommunication being themselves multipliers for further growth, has gained ground. All in all capital expenditure is running at an extraordinarily high level of 40 % of East German GDP. This involves a steady job creating process and stimulates economic growth. The real GDP growth rate of East Germany was nearly 7 % last year and it could reach nearly 8 % this year. lf we could hold it at this average level over the next few years this would mean a doubling in the size of East Germany's economy over a 10 year period. There is no reason why this should not happen.
Where should the money come from? Private investment mainly channelled through Treuhandanstalt privatization programmes has been the main stream of capital influx so far. As at the end of March 1994 the privatization record of Treuhandanstalt showed 14.000 finalized contracts covering investment promises of 157 billion DM together with job creating promises of 1.5 million for East Germany as a whole, Saxony accounting for 30 % of these figures.
Additionally tax payers money is needed for some time to support and promote the investment process. For the last three years, and also for 1994 and continuing for at least the next 5 years to come, assistance to the east including every thing from unemployment benefits to debt write-offs, to road investment and general between 150 and 180 billion DM.
These subsidies are looked at with some suspicion, but they are indispensable.
As Ludwig Erhard put it in perspective already in the early fifties, in case of German unification there was a temporary need to support the East German economy, not for survival of uncompetitive industries, but to give injections of capital and know how to those companies having enough potential to survive in the future, and make them fit for strong competition in the unaccustomed market economy environment.
To achieve this there is still some way to go. East German GDP accounts for 9 % of national GDP, whereas the corresponding share of population is 20 %.
Yet the recovery process is immense. Temporary strong reduction in the labour force is the negative, sharp increases in productivity the positive side of the coin. From 1991 to 1993 productivity in Saxony's economy for example rose by 160 %. 50 % of the West German productivity level has already been reached.
Economic recovery policy is focussing on real income. Although we have to live with distinct differences between East and West for the time being, the adjustment process is well under way. From 1989 to 1991 we had exceptional increases in real income of 18.5 % p.a. on avarage, unique in history. Since 1991 annual growth of real income is running at 8 % p.a.
In this context, another point of the success story should not be overlooked. Inflation has been kept under control to an extent remarkably contrasting to developments in neighbouring countries of the former Eastern Bloc. Whereas national inflation is running at 3 % p.a., the figure is under 4 % in East Germany. So the strong regime of the Bundesbank has also contributed to the successful process of economic integration.
This should be taken as a promising invitation for foreign capital to be invested in East Germany. The more so as for instance Saxony enjoys excellent geographical advantages, connecting western with eastern markets.
If Europe were a top, the continent would spin around Saxony. Leipzig, where the oldest trade fair of the world is held, is at the crossroads of the Via Regia and Via Imperia, two traditional trading routes. The five million Saxons live in one of the most densely populated regions in Europe. Here you will find more consumers than in many cities of the world put together.
As part of the European Union Saxony enjoys excellent relations with future members of the Community in Eastern Europe - the Czech Republic and Poland. Important members of the Blue Chip League of global companies have already invested here, for example AEG, Airbus Industries, Alcatel, Asea Brown Boveri, Panasonic, Philips, Quelle, Coca Cola, Siemens, Sony, IBM, Power Gen and Volkswagen. Enso Gutzeit has built Europe's most modern paper production plant for 800 million Deutsch Mark north of Leipzig. And we are especially proud of Siemens' decision to build Europe's biggest chip factory at Dresden producing the new generation of 64-Megabit chips, investing 2.7 billion DM and creating 1.200 new jobs, and as a follow up will attract, as we hope, more microelectronic business and related services. Thus Saxony is weIl under way to "square one" of continental Europe's industrial development, when it was the cradle of industrialization. Conditions are promising for this region, covering four universities, a dozen colleges, thirty research institutes and forty special research agencies with alone 2.000 scientists under contract to become again a "Saxony Valley" for innovation and high tech development at highest international standard.
Together with neighbouring Saxony-Anhalt we are also going to restructure the East German chemical industry, having played an important role for the economic development of the region in the past.The recent start to build up Leuna refinery, a joint venture involving French, Russian and German capital was the first step to re-establish the chemical "triangle" Leuna/Buna/Böhlen and to reintegrate it into the European chemical's business network.
Reviewing these highlights of our restructuring programme we should bear in mind that it is only four years ago when we started the process. I should remind you that we had to concentrate on several strategic fields of priority at the same time, some of which already advanced far.However some others need our full commitment to guarantee success. I mention these strategic fields of priority in brief in order to give you the chance of going into it in more detail in the discussion round, if desired:
Let me finally focus on only one of these strategic fields of priority as it is governing to some extent the whole recovery process: energy.
The former GDR survived for forty years thanks to the abundance of lignite resources. The GDR government established lignite as a universal source of raw material - for use in virtually all strategic sectors of industry: chemicals, electricity, gas, and heating processes in heavy industry. Brown coal provided about 70 per cent of all primary energy requirements; 90 per cent of the country's electricity production was based on lignite.
Abundant availability tends to become a temptation, the more so as policy principles of self-sufficiency and autarky resulted in alternative energy supplies being more or less kept out. This led to such excessive use of lignite that the GDR ranked third in terms of per capita energy consumption on a world-wide scale.
The other side of the coin was the fact that the GDR was the world champion in soil, water and air pollution - with deep-rooted, long lasting consequences for the environment, nature and the health of the population.
This misuse and predatory exploitation of resources in the past places a heavy burden on the restructuring process of our economy in the future, we do not take the appropriate action to build up a modern energy structure based on sustainable development and on free access to the market for energy sources and similarly a free choice for the consumer.
How to achieve this?
What we had to do was to get rid of an environmentally disastrous management system based on excessive exploitation of resources and replace it with economical and environmentally sensitive use of a valuable and competitive energy resource.
Many people in East Germany are so dissatisfied with lignite that they would prefer to abandon this industry and close all the pits and production fields, rather than to retain this valuable resource and make the best of it.
So it was not easy to convince the local community that they had a valuable resource on their doorstep, and that they should discard the idea of abandoning lignite production. A great deal of resistence has yet to be overcome in this field.
Task number two was to find a new entrepreneur who would be ready to take over the business of lignite mining in an environment burdened with negative emotion. We have two different mining areas (Lausitz in the east and the region surrounding Leipzig). Willingness to continue with the business has been more apparent in the eastern mining area, though the privatization process is progressing to a greater extent in the Leipzig area, where we have the Anglo-American-Consortium Power Gen/NRG Energy/Morrison Knudsen who bought the mining and production facilities, and succeeded in getting access to electricity production in that region. We are glad that Treuhandanstalt finalized a contract some days ago to sell also the Lausitz mining company to a West German consortium led by RWE.
Task number three was to find somebody to pay the bill for recultivation of devastated areas of former lignite mining containing serious land erosion and widespread contamination of soil and ground water.
These so-called moonscapes contain damage to the environment costing in the order of 20 to 30 billion Deutsche Mark.
lt is in my view part of the success story of restructuring the East German economy that, in a combined effort of the Federal government and the East German Länder, a recultivation programme has been set up to redevelope the devastated mining areas. The programme has been running since early 1993 with an annual spend of 1.5 billion DM, and employing 15.000 miners who had been layed off as a result of the restructuring and privatization process of the lignite mining industry.
Thus we have made some progress in restructuring our energy system over the last four years. The bottom line is that we reduced primary energy consumption in East Germany from 128 million tons CE in 1989 to 70 million tons CE in 1993, i.e. by 45 per cent. Although the greater part of this reduction is due to the collapse of industry throughout the region, we have additionally started a process of economising on energy utilization in all consumption areas, supported by greater efficiency through the introduction of modern technologies across the whole range of production, transport, transmission and distribution - as well as in the consumption sector.
An inside look at the structural changes in energy consumption during the past four years shows the following picture: The share of lignite has been reduced from 70 to 50 per cent, whereas the share of oil has doubled from 15 to 30 per cent; the share accounted for by natural gas has increased by one half, namely from 10 to 15 per cent; the other energy sources remain unchanged at 5 per cent.
Our strategy for reshaping the lignite industry is to reduce production levels down to about one-third of the traditional volume, i.e. from 300 to below 100 million tons, concentrating - with respect to the marketing side - on deliveries to base load power stations.
We wish to continue mining in both the Lausitz and Leipzig districts and are supporting the electricity producers' plans for the building of new installations and the upgrading of capacities. The East German electricity group VEAG alone intends to invest 20 billion DM over the next 5 years in power plants and distribution nets. They plan to build up new power plants with a total capacity of 8.000 MW.
Two of the three newly planned power stations, each of them 1 600 MW capacity, will be built in Saxony, one in the east and one in the west, each of them involving investments of between 4 and 5 billion Deutsch-marks. Both projects will be started by the end of this year resp. early next year and they alone will have wide ranging multiplier effects on economic recovery in the region. These are the real kind of projects we are looking for and which give us the confidence that in the end we will make it!
© B-I-K Consulting |
Juni 1994 |