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Promotion in Germany’s New Laender

by Rolf Brenner, Federal Ministry of Economics and Technology

ECE Timber Committee, Germany, 2 – 6 June 2002

Ladies and Gentlemen: Welcome to Berlin !

I am very pleased at your interest in the programme we call “Aufbau Ost” (or rebuilding the East) by which we have supported economic transformation in the former GDR from my country’s reunification almost 12 years ago. I am not going to bore you with a simple enlistment of the promotion instruments we have employed. After all, economic life in eastern Germany had to be completely transformed. The former command economy had to be substituted for a modern market and services-based system. People in eastern Germany had to be familiarised with the Western economic standards, and their living conditions must be gradually improved to meet those of the West. I should like to discuss with you the following three aspects: What is the present economic situation in East Germany? What developments are to be observed, and what are the current political challenges?

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From the break-down of the former GDR in the early 1990s, unique in dimension, Germany’s new Laender have made important steps in advance on the road towards becoming a modern and future-oriented economy. A great sense of commitment and willingness to accept change have enabled people in the east to achieve impressive successes with the solidary support of their compatriots in the west. And individual living conditions have crucially changed in many respects as well.

Almost 530 000 new small und medium businesses, including 110 000 craft establishments, have managed to stay in the market after German reunification. Many of them have been able to gain a foothold also in international markets. More than 3 million new jobs have been created in small and medium-sized enterprises alone. Overall, labour productivity and per-capita incomes have more than doubled. The transport infrastructure has been expanded and widely modernised. Housing standards have improved noticeably. The previously very substantial levels of pollution have visibly declined.

But we do not wish to conceal that there is still much to be done. Special mention should in this context be made of the need to reduce unemployment, more than twice as high as in western Germany, to solve structural problems in the East German construction industry and to rehabilitate the former lignite and bismuth mines. Profitable big businesses are still too few; as a result, there are special structural deficits in research and development and in regional value added chains.

Moreover, the productivity level is lower in east than in west Germany, although the discrepancy has become visibly smaller more recently. For instance; the average gross domestic product per gainfully active person came to 68% of that of the west in 2000 compared with 34% in 1991.

The east-west difference in productivity is structural in nature because of a poor value-added intensity and of the absence of big businesses headquartered in eastern Germany, for instance. On the other hand, East German companies have deliberately run a low-price policy to force their entry into supra-regional and global markets, which partly explains the lower level of productivity. In addition, they still have to cope with business organisation, management and marketing difficulties.

However it is gratifying to see that the former sectoral patterns of production and employment have gradually been substituted for structures that are more typical of a modern industry-based economy. So we have put economic reconstruction in East Germany on the right road. But for the time being, the situation is still characterised by countervailing trends:

·  The construction industry – the most important growth industry in the first half of the 1990s – is subject to unbelievably drastic change with an enormous reduction in excess capacity and dreadful losses in jobs. A backlog in the demand for housing and commercial construction as well as for infrastructure in the first few years after reunification have been responsible for excess capacity in the main.

·  At the same time, the economic growth recorded for the manufacturing sector and the industry-related services sector has been above-average in East Germany and much faster than in west Germany. In 1998, the level of output of the manufacturing sector in East Germany had outgrown that of the construction industry for the first time. Since then, the manufacturing sector has been a mainstay of economic development; its share in the gross domestic product was 15.2 percent compared with only 9.6 per cent in the construction industry.

More recent economic data show that the manufacturing sector is a source of dynamism. Last year, the gross value added of 8.3 per cent was clearly above that of the old Laender at 5.6 percent; employment expanded by 2.9 percent to 613,000 against 1999. Besides, the competitiveness of East German manufacturing enterprises has visibly improved. Average unit labour costs are now clearly closer to the lower west German ones.

This improvement in the competitiveness of the East German manufacturing sector was also reflected by last year’s 28.3 percent increase in foreign sales. Within five years, the share of East German exports in the total volume of sales had almost doubled from 11.8 percent in 1995 to 21.2 percent in 2000, although it was still visibly lower than in western Germany. Nonetheless, this may be deemed a remarkable success.

Structural change has also been fuelled by services. In 2000, this sector recorded 5 percent in growth and has remained dynamic ever since.

The average annual rates of growth in the gross value added recorded for the individual sub-sectors of the economy between 1995 and 2000 show that a modern economic structure is gradually coming about with a balanced relationship between manufacturing, construction and services.

Especially the technology-oriented branches of the manufacturing sector have grown above average and have thus braced the East German economy for the challenges of the future.

Especially car manufacturing, microelectronics, data processing, chemistry, bio-technology and energy represent important industries in East Germany.

Automobile manufacturing has become a propellant of economic activity and one of the most important job providers in the new Laender. Car manufacturers and sub-suppliers have invested over $5 billion in new production facilities from 1991. This industry currently provides over 100,000 East Germans with jobs.

The recent BMW decision for Leipzig as a new location for production underlines the excellent conditions the new German Laender can offer. According to the BMW managers, good transport conditions, available expert personnel and flexible work arrangements have ultimately prompted their decision.

The investment dynamism in manufacturing also has continued to be stronger in East than in West Germany. On a per-capita basis, investment in eastern Germany was, on average, more than two times up on that of the old Laender in the course of the last five years.

This explains the quick expansion of the capital stock of the East German enterprise sector in the last 11 years. For this reason, the gross fixed assets per employee of the enterprise sector already averages 85.5 percent of the value recorded for West Germany; the value estimated for manufacturing is only 8 percent lower than in West Germany now against 50 per cent lower in 1991.

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The second part of my paper discusses: What political measures have been taken in support of this transformation and integration process?

The German Government has supported the necessary structural change by a bundle of measures. Its main economic and financial policy objectives always have been to further strengthen the East German economy’s own dynamic forces to create an innovative self-sustaining and internationally competitive economic region and to create more competitive jobs. Although further economic reconstruction in eastern Germany is a matter for business and although development may not be artificially expedited by specialised governmental programmes, the East German economy’s own dynamic forces are not yet strong enough. For this reason, the German Government has complemented its growth-oriented economic policy aimed at improving general framework conditions by a promotion concept specifically designed for the needs of the new Laender which focuses on innovation, investment, infrastructure expansion as well as labour market improvements.

First: The most important political objective is to create growth-promoting framework conditions. The economically necessary structural change will therefore be substantially supported by a Federal Government policy friendly to investment also in the next few years.

Second: The Federal Government supports innovative forces. The upswing recorded for the manufacturing sector already shows a noticeable strengthening of the dynamism of innovation in the last few years. Small and medium-sized businesses – they are the vast majority of the East German enterprise community – now spend as much as their west German counterparts on research and development, that is about 2.5 percent of their total net sales. Apart from this, a large potential for innovation has been observed to develop in the wake of increasing integration between business and academic research and development. Impressive examples of sectors with top-level achievements in this regard are bio-technology, microelectronics and surface treatment technologies as well as the export push of recent years. All of them show that industry in the new Laender is now playing an increasingly important role in the field of product innovation as well.

Especially important for a rapid improvement in the technological performance of small and medium-sized firms is supporting networks, innovative clusters as well as innovation and business start-up initiatives.

Third: Like in west Germany, regional business and economic growth centres have developed which are important for the regions surrounding them. The German Government’s promotion policy must focus on the special needs of structurally weak areas as well as on the large needs for promotion and infrastructure of larger centres and growth poles.

Impressive examples of regions with an outstanding economic and social development are Berlin-Adlershof, Dresden, Erfurt, Leipzig, Jena, Rostock and Frankfurt/Oder, where a large number of new technology-intensive and innovative companies have established within an only short period of time offering attractive and competitive jobs to qualified labour. These regions show the enormous development potential of the new Laender. These growth centres have been able to make use of locational advantages, including highly qualified labour, near-by universities and research establishments, a relatively high industrial and population density, rather good transport connections with other large agglomerations as well as integration between business and academia. Even though their level of performance my not yet be quite as high as that of west German economic centres, certain East German regions already have a large development potential. For instance: the share they record for employees subject to compulsory social insurance in the total resident population already exceeds the West German average in certain prosperous regions. By way of example: in 1999, cities such as Dresden (47.8 percent), Chemnitz (48.2 percent), Jena (44.8 percent) and Leipzig (47.2 percent) saw values that are above the federal average at 33.4 per cent and above the average of West Germany at 33.3 percent. However, they cannot yet compare themselves with the economically strongest regions in the old Laender, that is Munich (53.7 percent), Stuttgart (58.2 percent) and Frankfurt/Main (71%).

Fourth: East Germany as a centre of business will further gain in attractiveness from targeted

investment in the transport infrastructure and in urban renewal.

Last year, the Federal and the Land Governments reached a basic agreement upon how to finance further economic promotion in East Germany in future. Within the framework of the so-called “Solidarity Pact II” East Germany will receive for the period 2005 – 2019 about Euro 150 billion to offset deficits in its infrastructure in the wake of the former division of the country. The funding volume and the length of the agreement give people an idea about how long the way they have to go still is.

Fifth: Especially the younger generation in the new Laender must be given a perspective. The special assets and capabilities of East Germany that deserve to be further promoted include in particular high levels of educational achievement and performance of the gainfully active population. Investment in labour qualification as well as research and development promise above-average returns. These areas are of key importance for the further development of the new Laender.

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At this stage, I should like to comment briefly upon a challenge we are facing: I mean the expansion of the European Union towards the east.

As a result, Germany – more particularly East Germany – will be located in the centre of an expanding European Union. This offers big opportunities to German businesses in an internal market that will have grown by some 100 million people. The relations between the candidate countries in eastern Europe and Germany have been close by tradition. Germany expects to handle roughly 40% of the EU’s trade with the candidate countries.

I have already mentioned that industry in the new Laender has developed an enormous capacity for penetrating international markets including largely saturated ones. The knowledge they have acquired in this context will be extremely valuable and helpful to them when seeking to access the markets of central and eastern Europe. The transformation experience East German businesses have acquired will be an asset for them also in eastern Europe. They will have a lead in fields such as rehabilitating large prefab apartment blocks and lignite mines.

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In conclusion, I will try to venture an answer to a question that may be of special interest to you: In what way has the timber industry been supported in the new Laender, and what have been the results of such support?

Within the framework of regional assistance, a total of EUR 4.386 billion was invested in the timber industry in East Germany in the course of the last 10 years; this amount includes EUR 1.05 billion in terms of German and European regional assistance - Joint System (GA) and ERDF - funds. This money has helped create some 25,000 additional competitive jobs and secure another 31,7000 existing ones.

In the East German paper industry, an amount of EUR 4.8 million has been invested after reunification; this amount includes EUR 1.01 million in terms of German and European regional assistance funds creating 13,800 jobs and securing 21,200 existing ones.