Mon, 26 Jun 2000

Lessons for Korea on unification

By Bernhard Seliger

SEOUL: Ten years after German unification, what lesson can Korea learn? Ten years ago, in 1990, Western and Eastern Germany became unified. After a short period of unrest in 1989, unification was finalized incredibly fast and came as a surprise to all, laymen and experts alike.

In the following years, Western German political, economic and social institutions were transferred to the former German Democratic Republic (East Germany).

Together with this, considerable amounts of money and expert knowledge were transferred to create the "flourishing landscapes," which then German chancellor Helmut Kohl had promised the Eastern Germans before unification.

Considerable changes were achieved and Easter Germans today enjoy a standard of living much higher than in all other transformation states in Central and Eastern Europe.

However, still some urgent economic problems are unsolved and an economic convergence is far from being achieved. This series takes a retrospective look on tens years of German unification and discusses comparisons with the Korean situation.

Economic cooperation in Germany before 1989 Since the policy of peaceful coexistence (Entspannungspolitik) in the 1970s economic exchanges between Western and Eastern Germany became more important. Western Germany became second most important trading partner (after the Soviet Union) for the German Democratic Republic (GDR).

In the 1970s the GDR used especially Western financial flows to import technology and improving living conditions for the citizens.

The grave financial crisis of the early 1980s showed that the socialist economic system had serious problems in comparison with the West.

For Western Germany economic exchange and co-operation was always an instrument for unification policy. While ultimately the ossified economic system of the GDR did not allow for large scale cooperation, nevertheless cooperation might have helped to gain trust, to alleviate the harsh living conditions in the GDR, to facilitate personal exchanges and so preserve the idea of national unity.

Institutional changes after unification In 1990 the Economic, Monetary and Social Union in may and the unification in October meant a complete transfer of the political, economic and social order of Western Germany to the East.

This transfer was facilitated by an equally important transfer of Western experts to all spheres of Eastern German administration, from government to universities and schools. This transfer is a unique way of transformation, compared to other Central and Eastern European states.

While on one hand the transfer facilitated adjustment to the new institutions, on the other hand some of the institutions, especially in the economic sphere, were dysfunctional. High levels of Western regulation proved to be unsustainable in Eastern Europe.

However, overall this transfer of institutions made the unification process irreversible, an important condition in a time when the success of transformation in the Soviet bloc, especially the Soviet Union itself, was not yet clear.

Monetary unification and its aftermath In may 1990 Western and Eastern Germany concluded a Monetary Union. Against the advice of the powerful Bundesbank, mainly for political reasons, the Eastern German mark (Ostmark) was highly revalued.

The exchange rate was (in average) around 1:2.25 (DM: Ostmark), while the market rate was estimated at 1:5 -- 1:10. The revaluation brought immediately higher living standards to Eastern Germans.

However, the firms suffered from the fact that despite low productivity and a used up capital stock they had to pay wages and debts and inputs at a highly overvalued rate.

So monetary unification guided by the political goal to achieve the greatest possible enthusiasm for reforms (and the conservative coalition supported by the Western German chancellor Helmut Kohl) led to enormous problems in the Eastern German industry.

Also, the subsequent policy of the Bundesbank to fight inflation led to the notorious EMS crisis of 1992-1993.

Restructuring the Eastern German economy The GDR in the 40 years of its existence and its application of central planning achieved a severe misallocation of investment.

Most problematic was the slow degradation of the capital stock. In 1990, most firms in the former GDR were not able to compete: low productivity, rusty machines and environmental problems were matched by incompetent management and ancient technology.

The German privatization agency Treuhand, for some times the largest holding company of the world, could only privatize these firms at considerable losses.

After 10 years of company restructuring, an ambiguous picture of the Eastern German industry emerges: While large investments in "industrial core areas" with the help of unprecedented subsidies stand for the modernization, still the average productivity in Eastern Germany is much lower than in the West.

The export orientation of Eastern German firms is still low compared with its Western counterparts. Restructuring is not yet finished.

One lesson is that also attitudes of the population are not easily to change. Any change of socialist man (homo sovietucs) to capitalist thinking (homo oeconomicus) needs time. The role of the state in this transformation process is rather limited.

Unemployment in Eastern Germany Unemployment in Eastern Germany ten years after unification still stands at a shocking level of 16-20 percent. In the last years, due to the decrease of public works programs, it even become worse.

The reasons for unemployment are twofold. One reason is the inherited burden of a dysfunctional, degraded capital stock.

Eastern Germany experienced after transformation a shortage of (modern) capital compared to relatively abundant labor.

The second reason is linked to the monetary unification revaluing the Eastern German wages plus the trade union policy of fast wage convergence.

Today, there is a large productivity gap between Western and Eastern German companies, much larger than the still existing wage gap. This led to deindustrialization in Eastern Germany.

To fight unemployment, which is not only an economic, but also a social problem, is one of the challenges still ahead for successful finishing the task of transformation.

Recent changes in the employers organizations indicate that to overcome this challenge also changes in the rigid Western German labor market organization are necessary. So, Eastern German transformation and Western German reform must come together.

The author is a professor of European studies at the graduate school of International Area Studies of Hankuk University of Foreign Studies, and also does research at the University of Witten/Herdecke, Germany.

-- The Korea Herald/Asia News Network