To Avoid the Collapse of Eastern Germany

THE Five New Lander (old East Germany) is in trouble: Approximately 30 percent unemployment and decline of industrial production by 50 percent. There are few examples of investment by outside enterprises; there's an exodus of more than 10,000 citizens monthly. The costs for the economic transition of East Germany are much higher than previously estimated. Unexpected high deficits in the state budget and rising interest rates are the bitter realities of German unification. The destruction of an industrial region like this is a unique case in the history of Europe, and a crime. Time was lost and money wasted - trying to finance the unemployed. Money would have been better used to establish a favorable investment climate. The German Economic, Monetary, and Social Union failed after nine months. There were alternatives. But the German government decided in favor of ``super shock therapy'' by the instant introduction of the deutsch mark (DM) and the replacement of East German currency.

This decision was understandable. But it had to be accompanied by a comprehensive framework for the economic reconstruction of the former GDR in light of the experience of other Central and East European countries. Unfortunately, such a public development policy for the former GDR was rejected by Chancellor Kohl on free-market principles, and expectations. These expectations were erroneous.

REACTING to the economic crisis in the Five New Lander and the political risks involved, Bonn established an emergency program ``Gemeinschaftswerk Aufschwung Ost'' (``Common deal to revive the east'') to avoid further loss of time. Heavy new taxes for cars, fuel, tobacco, and salaries were instituted (violating election promises). Special incentives for investment were provided. Twelve billion DM in additional funds for 1991 and the same amount for 1992 have been allocated to increase the investment all owance. Special depreciation is designed to create new jobs and promote private investment. Property and business taxes were retroactively eliminated in the Five New Lander - going back to Jan. 1990.

Altogether, investments to restructure the old GDR economy has reached approximately 50 percent - a total of 51 billion DM for both 1991 and 1992. This is regarded as a new option for investment. Thus, German industry is expected to soon invest about 70 billion DM in East Germany.

The danger of an economic collapse in the Five New Lander has not yet disappeared. Enough new jobs may not be created. The investment allowance should be higher. The activities of the Treuhandanstalt to reprivatize East German enterprises must be accelerated, especially to attract investments from other West European countries, the US, and Japan.

Unfortunately, the German government has still not developed an economic policy for the reconstruction of the different sectors in the Five New Lander.

In the meantime, the rate of unemployment may exceed 40 percent and some economists are expecting even 60 percent. Production will again decrease in the next months because it is difficult to overcome 40 years of centralized ``planned economy'' quickly. Exports are expected to decline by 50 percent, especially to the Central and East European countries and the Soviet Union. Moreover, hundreds of thousands of citizens will leave the Five New Lander. Demonstrations in the cities are starting up again - re flecting the political problems engendered by the critical economic and social situation. Forebodingly, the Christian Democrats (CDU), Kohl's party, lost the elections in Rhineland-Palatinate as a result of voters reacting to unfulfilled promises of the CDU-based government.

Three main tasks have to be resolved now to avoid a collapse in eastern Germany:

First, establish and implement a development program - one that can take high technology to the Five New Lander (following the example of Bavaria). Without such technologies there will be no second ``German economic miracle.'' Second, incentives must be found to attract West German experts to help speed up activities in the local administration of eastern Germany. Third, quick restructuring of the educational system in the old GDR will help jobless East German citizens begin to learn new professions, an d the basics of a new development strategy.

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