ABSTRACT
The East German economy now expands at an annual rate of about 7 percent. However, macroeconomic imbalances and structural distortions are still large. Overall domestic demand exceeds supply; consumption is larger than GNP; wage costs are higher than value-added; and the share of manufacturing in the Gross Domestic Product (GDP) is half of what it once was and also half of the corresponding value of manufacturing in West Germany. The weakness of industrial production is largely the result of costs that are too high. Productivity levels are still too low compared to wages, which are rapidly approaching the West German level. The relatively high overall economic growth results from activities that face little competition and that benefit from the high transfer payments by the federal government—such as local services, food products, construction and the various suppliers of construction materials including construction-related crafts.
East German growth therefore is correctly labelled as transfer-led growth rather than self-sustained growth. As a consequence, 664the East German economy will only be able to maintain its present high growth if transfer payments remain at a high level for some years to come. But even with a growth rate of 7 percent or beyond, the employment situation is unlikely to improve.
Today there are 40 percent fewer jobs in East Germany than there were before unification. The new industrial activities that emerge in East Germany are highly capital intensive and use the latest technology. This is beneficial for productivity increase and economic growth but damaging to the prospects for new jobs.
East Germany’s share in German territory is 30 percent; in the labor force, 21 percent; and in GDP, 9 percent (table 1). Real output of the East German economy declined in the year of the currency union (1990) by 15.5 percent and in the year thereafter by nearly 30 percent. In 1992 East Germany staged a strong recovery with a growth rate of over 9 percent. Since then economic growth ranges between 6 and 7 percent. Key Economic Indicators of East Germany, in Current Prices
|
Measure |
1993 Values |
% of total Germany |
|---|---|---|
|
Area (km2)…. |
108,331.8 |
30.3 |
|
Population…. |
15,668,800 |
19.3 |
|
Labor force a …. |
7,866,000 |
21.4 |
|
Employment…. |
5,683,000 |
18.0 |
|
GDP (Billion DM)…. |
275.5 |
8.9 |
|
Manufacturing…. |
44.7 |
5.4 |
|
Services…. |
60.2 |
6.1 |
|
Consumption…. |
232.3 |
13.0 |
|
Investment…. |
139.2 |
19.7 |
|
Exports…. |
76.1 |
6.9 |
|
Imports…. |
277.2 |
25.3 |
Labor force data only for 1992.
It is now widely acknowledged that the initial economic breakdown of East Germany resulted from the supply shocks of the currency union and the wage explosion. The alternative interpretation that there was a lack of demand due to reduced purchasing power in the region and the collapse of export markets in Central and Eastern Europe cannot be maintained. Over the entire period since the introduction of the deutsche mark as legal tender in East Germany aggregate demand was far in excess of aggregate supply. Demand was not only maintained, but even increased due to the rapid build-up of a large transfer flow from West to East Germany. The currency union and the transfers distinguish East Germany from other formerly socialist countries and make the adjustment pattern of East Germany unique. The subsequent discussion focuses on four issues: macroeconomic imbalance, structural distortions and adjustment, external trade and East Germany’s growth potential in the years to come.
Supply and Demand in East Germany, 1989–1994 https://s3-euw1-ap-pe-df-pch-content-public-p.s3.eu-west-1.amazonaws.com/9781315481777/5e7fdaa4-d9e8-4db7-b4ae-ecc3c9e5c892/content/fig33_1_B.tif" xmlns:xlink="https://www.w3.org/1999/xlink"/> Source: German Institute for Economic Research (DIW), Berlin.