I believe this presentation on East Germany was given to the World Bank around 2000.
The Problems of Transformation
Let me now turn to some of the basic problems of the transformation process. What were the conditions in the former GDR at the time the transformation process started? An important quality of this transformation process was the disequilibrium between East and West. The West German population made up 80 percent of the total population of Germany, the East German population made up 20 percent. At the time of reunification, West Germany produced 93 percent of the total GDP of United Germany; East Germany produced a little more than 6 percent of the GDP of United Germany, which was a tremendous disequilibrium compared with the population.
As I said, there was little knowledge of what had really happened in East Germany. We knew there had been a centrally-planned economy that had been integrated into COMECON. It was an economy, the full consequences of which we only realized later, that was concentrated on full employment, but not in our concept of full employment. For purposes of ideology, as well as of control of the population, everybody had to be employed somewhere, so the employment quota of the employable population in East Germany was a little over 90 percent; more than 90 percent of the employable population between 15 and 65 was actually employed, regardless of whether this employment was productive or nonproductive.
There was a strong realization of equality of results, not only equality of opportunity. In other words, the spread of income was roughly one to three. People had more or less the same conditions of life. If you exclude the nomenclatura, to which nobody compared himself or herself when making comparisons with others, the living conditions of the population were characterized by almost equal actual opportunity, equal housing conditions. There was very little inequality in the country.
The level of industrial development, infrastructure development, and so on was equal to about the level of development in West Germany in the late 1960s. In other words, the economic development in the former GDR had more or less stopped at a certain level, namely, the level that West Germany had reached in the late 1960s. Actually, it is interesting to follow the developments since 1949. In the first 10 years, growth rates were somewhat the same, and development of the Germanies was also somewhat the same, and then the East was falling back, and finally stagnating in real development. The main reason for this—time doesn't permit me to go into this in detail, but it is a very interesting aspect of conditions prior to the transformation process— is that centrally planned economies can only manage a certain level of complexity, and as you develop an economy, with the increasing performance of your economy, complexity increases.
In other words, if you want to increase the performance of your economy, of your administration, of your division of labor, you have got to be able to manage increasing complexities. Centrally planned bureaucracies cannot do this, and as a consequence, in the late 1960s, early 1970s, the economic development in the GDR began to stagnate.
The rulers of the GDR did not attribute this stagnation to central planning, but they were convinced that they had not planned enough, in other words, that they had permitted certain segments of the economy to stay outside of total central planning, in particular, small and medium size industry.
So in the early 1970s they responded to the stagnation by nationalizing the small and medium size industries, thus extending the central planning to all aspects of economic life. The consequence was that they lost the last areas of flexibility within their economic system. As a result, they were forced to exploit existing resources, and as a consequence of that, they exploited capital stock, they exploited the infrastructure, they exploited the ecology, and they exploited whatever human resources were available.
So, quite different from what we had expected to find in the early process of reunification, we found a totally dysfunctional economy, highly exploited, an almost broken down infrastructure, a useless capital stock, and great deficits in human resources—not in the qualification of labor, not in the qualification of engineers or scientists; they were very well qualified—but in the qualification of all faculties that you have to have at your disposal if you want to operate an open society and a market economy.
This is what I would like to refer to as the mental conditions of the transformation process. My experience so far with analyzing transformation processes in other parts of the world—in Russia, in the Ukraine, in Poland, in Hungary—is that Western advisors usually do not understand that the transformation process does not only have economic and financial dimensions, that one of the most important aspects of the transformation process is the mental aspect. And there are several dimensions to this mental aspect.
The first is that all these societies or nations had a condition that you can call "the guardian state." The state not only controlled the economy, the state controlled every aspect of life, including all risks involved in life. So the social systems had been perfected on a very low standard of living, but with a totality that left no room for private initiative or for private risk taking.
In other words, there was a tradeoff in all these countries: freedom against security. And this tradeoff is especially important in the transformation process when difficulties arise in adapting the market economy. So you find in Poland and you find in other countries that first, there is euphoria about the newly found freedom, then there is a sobering up, a great disappointment, a nostalgia in remembering the old securities vis-ˆ-vis the present risks and uncertainties, and only after this period is passed through—and in Poland you can see it almost in the perfect version—only after this has been overcome and people begin to understand the functions of private property, the functions of risk taking, the interrelationship between freedom and uncertainties, the need to accept inequality as a source of dynamic forces in the process of social development, only after they understand this will they return in their political support to the open system. In Poland this was obvious through the first, second, and third legislative periods that the country went through.
One of the most important characteristics of the socialist economies and systems is the condition of equality. De Tocqueville and others have observed that the human condition has a great affinity to equality, and that to understand inequalities is a cultural phenomenon. You have got to understand why inequality exists if you don't just want to suffer it. The overcoming of this resulting equality—not only equality of chance, but equality of condition—is part of the transformation process. You have to spend a lot of time explaining why equality is reduced and why there are stronger differences.
The legal condition of the transformation process is also very important. One of the things we have to understand is that the transferal of a market economy, let's say into Russia or into Poland or into Hungary, requires the rebuilding of a system of private law. In all of the communist countries, or the formerly communist countries or countries under communist control, the private law system was not totally eliminated, but reduced to very little importance. Private law was governing the immediate relationships between persons buying and selling in the private sector, marriage, child care, and things of that sort, but as soon as you entered the economic sphere, private law lost importance.
Private law is married to an open market economy. If you have a centrally planned economy, you have public law. The hierarchy of public law, of the command system in a planned economy, replaces the private law system. You have no government by law. Quite to the contrary, in communist countries law had to be prejudiced to the advantage of the working class, or the ruling class if you please. The impartiality of law as we know it is considered to be detrimental and inconsistent to the ideology of a communist system. And there was no reliability of administrative behavior, and there was no way of controlling, or even having rights toward, administrative behavior.
So what you find is not only an economic deterioration—exploited capital stock, exploited ecology, exploited infrastructure—but you also find what I would like to refer to as tremendous mental deficits in relationship to the requirements that have to be available, or the faculties that have to be available, if you want to perform a successful transformation process.
Transformation in East Germany
In Germany, the transformation process took place under very favorable conditions. The most favorable condition, of course, was the existence of West Germany, with its tremendous economic strength. West Germans have been willing ever since 1990 to transfer financial resources from West to East Germany to the tune of about 3 to 3-1/2 percent of GDP, which is quite a lot of money.
The second advantage was that we did have a fully developed and highly productive market economy system to fall back on, and therefore, all we had to do—"all we had to do" is rather euphemistic—but all we had to do was transfer the legal system from West Germany to East Germany. In doing so, we could rely on a long industrial tradition, especially in the large Berlin area and in Thuringia and Saxony and Saxon-Anhalt. All of these areas had been very important industrial areas of Germany prior to the Second World War. As a matter of fact, GDP per capita in Saxony in the early 1920s was the highest in Europe. It was one of the most productive and one of the most highly developed industrial regions in Europe. One of the three cities, Kemnath, was referred to as the Manchester of Germany, because it was the center of the textile industry and textile machine building. Thirty percent of the demand for cars in Germany in the 1930s was supplied by car builders in Saxony, and more than 50 percent of the demand for high-priced cars was supplied by car makers in Saxony. So there was a very strong traditional base for the rebuilding.
However, substantial deficits and disadvantages had to be overcome with the help of West Germany. Two of the most important I would like to mention in closing. Now, given that infrastructure investment, rebuilding, and overcoming of ecological deficits and damages were all packed into this transfer of money, resources, people, and know-how from West Germany to East Germany, there were two deficits that you cannot easily eradicate.
One deficit was the deficit in elites: elites that you require for a civil society and for a market economy. I am not talking about the engineers, I am talking about the people who can run enterprises, who can operate an enterprise, who can build up a company capable of competing in the world market. We do have a lot of people who want to do this, but they have to catch up with all the knowledge and experience that was gathered in West Germany through 45 years of participation in the European and world markets.
And closely related to this is the other effect of having been excluded from the world market. You can study almost under laboratory conditions in Germany what it means to have been excluded from a competitive process for a long period of time and to have been subjected to a system where you are better than the others, because they are still worse than you are.
The immediate consequence of having been excluded is that you have been deprived of the evolutionary stimulus that results from participation in an open world market—the incentive that you receive through the competitive process.
So there is a tremendous deficit in experience, and closely related to that deficit is the fact that you have no access to the world markets that you have been excluded from.
When we started our work in Saxony and the other parts of East Germany, we were hopeful that we could continue our old trade relationships with East Europe on a different basis, and one of the greatest disadvantages that followed after unification was the breakdown of the Soviet Union. Not only the political system, but also the entire economic and administrative infrastructure broke down with the collapse of the Soviet Union.
We had hoped that the very pronounced knowledge of the nomenclatura, of the way things work in the Soviet Union, in Russia, and elsewhere, would give us a competitive advantage that would compensate for the lack of knowledge about competing in world markets, but that competitive edge or competitive advantage was destroyed with the breakdown of the Soviet Union.
We have now been cooperating for five or six years with certain autonomous regions in Russia—Bashkortostan is one of them—but in the process of doing so, we are finding out how extremely difficult it is to rebuild reliable trading and investment relationships with these areas and how long and difficult a process it will be to come to a long-term, beneficial exchange in trading and investment.
What the Future Might Hold
Nevertheless, the prospects of the transformation process in East Germany are very positive. Even though we have high unemployment (we may discuss the reasons for this unemployment in the question and answer period), even though growth rates are not as expected—I never thought they would be, because you cannot maintain within one and the same economy very substantially different growth rates in one part, much higher than in other parts—but leaving all of that aside, I think we have reached a level of development in East Germany where you can say that we are approaching the critical mass of newly established companies, of investments, of improvements in the infrastructure where things begin to develop on their own strength.
We are far away from having reached the level of West Germany. But then, during the last couple of years, we began to discuss what I think is a very important question for our particular condition, and that question is should we copy West Germany, or should we try to find out where East and West Germany should be in the year 2015, thus assuming that West Germany also has to change?
With the Euro process, that need to change in West Germany is vastly increasing, and we are now more than ever certain that a better approach to what now has to be done in the further continuation of the transformation process is to ask ourselves what are the requirements for a successful economic region with a high density of higher education, culture, and a very well-qualified population. What are the real objectives for the next century? We are trying to define these real objectives, and we feel rather good at doing it, because the West Germans don't know either.
So here we are in a condition where we are competing on an equal footing. Neither of us know where the road will lead, and our advantage in the transformation process is that the country is not suffocated by an enormous amount of vested interests. The transformation process in East Germany has shown that the population is capable of absorbing the shock of change much better than anybody would have ever thought, and people are beginning to feel proud by having shown that they can do what obviously the population in West Germany has great difficulty in doing, namely, absorbing the shock of change and looking at change as a constructive and promising condition for developing future structures and future possibilities.
So in spite of all the problems we had during the last eight years and in spite of all the pessimism that surrounded this process, in a nutshell, today, 80 percent of the population, at least in my state, in Saxony, when asked about their personal conditions will say it's good or it is so-so, and only less than 20 percent will say it is bad. And I think that's not a bad result of the transformation process so far.
Thank you very much.
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