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Two Decades After Reunification, Why Eastern Germany Still Lags Behind The West

New and old in the eastern city of Dresden
New and old in the eastern city of Dresden
Steffen Uhlmann

BERLIN - Despite considerable efforts, the economic gap between eastern and western Germany is not shrinking fast enough.

While the East is indeed becoming more dynamic, it still lags far behind the West, according to the 2012 statistics compiled by the Initiative for a New Social Market Economy (INSM), which ranks German states for dynamism every year. The latest study shows Eastern Germany is developing faster than the rest of the country. Brandenburg, where taxable capacity rose by 16% between 2007 and 2010 and the number of jobs grew by 5.4%, ranked first. After that came the states of Berlin, Mecklenburg-Vorpommern, Saxony, Saxony-Anhalt and Thuringia – all in East Germany – and only then the first West German state, Hamburg.

But this dynamism has not helped the East much. A parallel ranking of the general level of German states by the INSM shows that Eastern German states are far behind, and, worse, losing ground. This jibes with findings by the Halle Institute for Economic Research (IWH), whose 2012 report on the East German economy says that in the first six months of 2012, it grew by only one-half percent while the West German economy grew at more than twice that rate.

According to Udo Ludwig, a IWH economics expert, this shows that the goal of rapid equality between the East and West is unrealistic. "The apparent catching-up during the crisis years was just temporary.”

Along with too few medium-sized and big-sized companies and a concomitant weakness on the innovation and export sides, East Germany has an aging, and dwindling, population. Although there is some growth in areas like Chemnitz, Dresden, Leipzig and Jena, the East German economy overall is not in a position to overcome its weaknesses. This means it will need subsidies well beyond 2019, when the 156-billion-euro Solidarity Pact II expires, if its standard of living is ever to reach the average West German level.

At the end of 2010, more than 65% of West German companies showed an annual turnover of more than 50 million euros, as opposed to less than 45% of companies in the East. While some Eastern industrial sectors, such as the auto industry, have become big players, they are mostly branches of West German companies. With the exception of railroad company Deutsche Bahn, not one large company has its headquarters in East Germany.


But some trends are going the other way. Since 2000 the number of innovative firms in East Germany has risen from 3,200 to 4,200. These are the kinds of companies the federal government wants to boost, and to that effect it is backing a program called “Twenty20 – Partnership for Innovation” to the tune of half a billion euros.

Using public money for this is, however, highly controversial after what happened with East German firms in subsidy-driven high-tech sectors. Dresden’s “chip miracle” offers one high-profile example of the possibly fatal consequences of state support. Chip producer Qimonda tried to compete, from Germany with its high labor costs, with its competition in low-labor-cost nations, and failed miserably because its powers of innovation were quite simply not good enough. The same fate probably awaits East Germany’s highly subsidized solar industry, which has not been able to hold on to its former technological advance over Asian competitors.

Those who know East Germany well, like former central banker Edgar Most, have been saying for a long time that German unity needs to be rethought. That would mean for instance redirecting subsidies to education and research. Most also believes that money needs to be spent on incentive programs to encourage the return of the young people who have left East Germany for the West.

It is an approach that appeals to East German states, and new measures have met with success. In 2011, for the first time, more people moved from West Germany to take up new jobs in East Germany than the other way around. That was particularly true for dynamic cities like Leipzig and Dresden, which are recruiting massively to compensate the fact that in aging Germany there are too few highly qualified workers to fill the positions opening up. Small- and medium-sized companies are desperately looking for qualified workers and have trouble finding suitable candidates.

According to economic experts, large West German companies should be encouraged to turn their highly productive East German branches into separate companies so that the East can benefit more readily from the value they create. This could be achieved through tax incentives, says Most. "It would benefit both West and East Germany; net proceeds would stay in the East and transfers of funds from the West could be reduced."

All experts agree that left to its own devices, the East will not catch up with the West, and that new investment will be required. But for that to happen, the East will have to become much more attractive to national and international capital.

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