Coping with Uncertainty: European labour markets and the politics of social reform Institutional change, transformation and development: the case of the

Coping with Uncertainty: European labour markets and the politics of social reform

Institutional change, transformation and development: the case of the

East German regions

Uwe BlienInstitut for Employment Research (IAB) &

University of Bamberg

London, 6th Nov. 20092

20 years after the fall of the Berlin Wall: an assessment of the transformation process in Eastern Germany

- Transformation was reached in one pace with unification

- In no other country the transformation process was done in such a fast and drastic way as it was in Eastern Germany (“big bang strategy“)

- This lead to great economic problems (1991: rate of BSP change in Eastern Germany: -31.4)

- The consequences have been visible until today


Steps of German unification

- During autumn 1989 repeated demonstrations and protests against the ruling SED party

- Increasing numbers of refugees left the GDR by neighbouring states (Chechoslovakia, Hungary)

- The power of the ruling group in the GDR was weakened step by step

- Opening of the Berlin Wall at 9 Nov. 1989 “by accident“

- Suggestion of introducing the D-Mark as currency in the GDR by Chancellor H. Kohl at 7 Feb 1990


Steps of German unification (II)

- Economic and social union between West and East Germany at 1 July 1990

- Currency union at 2 July 1990 (exchange rate 1 to 1 for wages, 1 to 2 for bank accounts)

- Unification at 3 October 1990 by accession of the regions of the New Federal States to the Federal Republic of Germany


Consequences of the currency union for the economy of the GDR

- The economy was nearly closed before and then – in one step – opened up to the economy in the West and to the world market

- Productivity in the East was only about 38.6 % of the West

- Production in the East was not profitable, it could only be sustained as far it was subsidized by the state.

- Unemployment increased in the following


Reasons for the high speed of institutional change and of unification

- Fear that the “window of opportunity“ will be closed again soon

- in Western Germany: Fear that many people could leave the East and move to the West (and increase unemployment)

- Impatience about the outcomes of the whole process, especially in the East

- Breakdown of confidence in the representatives of the state in the East

- Dynamics of the political system (pressure of elections)


Further reasons for realizing the currency union

- In the East the D-Mark was regarded not only as the symbol, but also as the reason of the Western living standard – not regarding all the conditions of economic life

- This was due to the “fetish character of money“ (Marx)

- Any experience with the mechanisms of a market economy was missing

- In the West the introduction was regarded as appropriate to make the unification process irreversible


Euphoria about unification - neglect of any economic problems

- The unification will lead to “flourishing landscapes“ (H. Kohl)

- Problem of high wage increases was regarded in moral terms: Why should someone in the East earn less someone in the West? Is he or she not a German too?

- There was no resistance of firms and employers associations against wage increases, thus, wages doubled

- The conditions of a market economy were disregarded

- The consequence was a big economic crisis with alarming proportions


Western Germanyproductivity

labour cost

labour cost

productivity

Eastern Germany

Productivity and Labour Cost


Federal Republic of Germany

Western Germany

Eastern Germany

BSP growth rates


Industry

construction

Quarterly growth rates


Eastern Germany

Western Germany

Unit labour cost


Properties of the crisis in East Germany

- Employment decreased from over 10 Mill. (1989) to just over 6 Mill. (1993)

- Unemployment increased to over 1.2 Mill.

- Many people were hidden unemployed in measures of labour market policy

- The firms in Eastern Germany were privatized by the „Treuhandanstalt“ (Trust Institution), which left a debt of over 200 000 Mill. €.


Meanwhile, 20 years later the Eastern German regions are quite “normal“ German regions – however severe problems remain

- Institutions are the same as they are in the West

- Eastern wages stagnate of about 75 % of the wages in the West

- The unemployment rate is still about double the one of the West

- There are only faint signals of a convergence process


Arbeitslosenquote nach Jahren

0,0

5,0

10,0

15,0

20,0

25,0

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Jahr

Alo

qu

ote

(%

)

Insgesamt

West

Ost

Yearly unemployment rates


Unit Labour Costs


Eastern Germany

Wages, productivity and unit labour costs


Manufacturing in Eastern Germany

Wages, productivity and unit labour costs


unter -5,0 -5,0 bis unter 5,0

5,0 bis unter 15,0 15,0 bis unter 25,0 25,0 und höher

Vorjahresveränderung in %:

Stralsund -7,0%

Eberswalde -9,2%

Bremerhaven -8,0%

Memmingen +70,3%Rottweil +63,5%

Villingen-Schwenningen +66,9%

Deutschland: +7,9%

Growth rate Unemployment rate

unter 3,0 3,0 bis unter 6,0 6,0 bis unter 9,0 9,0 bis unter 12,0 12,0 und höher

Arbeitslosenquote in %:

Deutschland: 8,1%

Freising 2,9%

Ingolstadt 3,0%

Donauwörth 3,1%

Sangerhausen 17,2%

Altenburg 15,6%

Neubrandenburg 15,6%

Regional Distribution and Change of Unemployment


How can the remaining problems be explained?

- Informal institutions might be effective which slow down a covergence process

- The firms in the East are often only branch-plants; they lack development capacities

- Social networks to the markets are missing

The result is an economy with a low export rate (about 30 %, compared to over 40 % in Western Germany)


Approaches of Krugman‘s new Economic Geography are suggested as explanation

- East Germany is the “periphery“ of the West

- Market potential is lower in the East: concentration of population is lower and the major agglomerations are in the West

- Today, the traffic network between both parts of the country is quite good

- Therefore, it might be profitable to produce (only) in the West

(Brakman, Garretsen 1993)


An extension, introducing the labour market

- A reaction on the labour market problems in the East is out-migration (1.8 million people)

- it has a direct negative effect on unemploment

- it also reduces the market potential of the regions and has an indirect positive effect on unemploment

- The direction of the net effect is open

(Suedekum‘s 2005 extension of New Economic Geography by the Wage Curve)


Conclusion

- The big bang transformation of Germany was unavoidable, due to reasons outside the economic sphere

- It did not facilitate a convergence process but led to stagnation

- The more recent developments of the East German regions show good values of some fundamental economic indicators, but no improvement in the labour market

- The latter might be changing due to recent events

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