East Germany‟s Economy on the Path from Transition to

Halle Institute

for Economic Research

East Germany‟s Economy on the Path from Transition to European

Integration: Achievements, Shortcomings and Challenges

Mirko Titze (in cooperation with Gerhard Heimpold)

Halle Institute for Economic Research, Postbox 11 03 61, D-06017 Halle (Saale),

Telephone: +49 (345) 7753 861, Fax: +49 (345) 7753 820, Email: [email protected].

Halle Institute

for Economic ResearchIntroduction

Mirko Titze: East Germany‟s Economy on the Path from Transition to European Integration 2

Personal background:

• Born 1974 in Eisenhüttenstadt (former

GDR) (see the map)

• Attendance of a school in the

hometown named after Juri Gagarin

• Aged 14 when the “Iron Curtain” fell

down

• Eisenhüttenstadt is closely linked with

the metallurgical plant located there

• This town/plant is an example for the

establishment of industries in the GDR

as a consequence of the German

division after World War 2 and the

beginning of the Cold War period

• After German unification it was difficult

to maintain these industrial cores

FRG

GDR Oder

Neisse

* The authors thank Mr. Michael Barkholz, Dept. Formal Methods and Databases, IWH, for producing the maps included in this presentation.

Source: Mapping

by IWH.*

Divided Germany (1949-1990)

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Main street and the plant

Town hall (built in the 50ies)

Source: Eisenhüttenstadt„s official website (www.eisenhuettenstadt.de)

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Appartments (built in the 50ies)

Theater (built in the 50ies)

Source: Eisenhüttenstadt„s official website (www.eisenhuettenstadt.de)

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Some short facts about Eisenhüttenstadt (see EKO Stahl GmbH [ed.] 2000):

• German metallurgical capacities before World War 2 = located in the western part

(Ruhr area)

• German division and hindered trade = establishment of metallurgical capacities in the

GDR

• It was a military strategic decision to establish such plant at the Oder-Neisse border =

this location represented the longest distance to the iron curtain

• “Official” motivation for the location‟s decision: locational advantages in terms of

transportation costs: crude and lime from Poland and ore from the Soviet Union

• 1951: start up for the construction of an iron and steel plant = technical experts from the

USSR supported the built up of the plant

• 1951: foundation of the residential town = “first socialist town” in Germany

• Permanent development of the plant to a large-scaled trust “Kombinat”

• Economic disadvantage in the late 1980ies: technological gap = technological

capacities of an integrated steel manufacturer have not been completed. There was a

lack of production capacities for hot-rolled strips. This required high transportation

(railway) capacities: Steel was transported to hot strip mills in the FRG or the Soviet

Union, after hot rolling back to Eisenhüttenstadt.

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What has happened after 1990 (see for example EKO Stahl GmbH [ed.] 2000):

• Modernization of production capacities (capital stock)

• Maintaining (of a reduced number) of jobs at production location Eisenhüttenstadt

• Successful privatisation = today part of a multinational enterprise → ArcelorMittal

• Reduction of employment to 2 413 (plus 3000 in connected industries) employees in

2010 (1989: 11 934)

• High productivity = the plant is highly competitive at world market

• EU enlargement lead to home market effects = EKO as entry to the CEE markets

Some shortcomings still occur:

• The headquarter in Luxembourg coordinates main functions

• Production site Eisenhüttenstadt: rather production related R&D (e. g. quality

management) than R&D in the broadest sense

• The regional network has emerged relatively weak = the plant receives intermediates

supraregionally and it supplies its products supraregionally

• Production related services in regional connected industries

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Initial situation in East Germany at the beginning of the 1990ies (Deutscher Bundestag

1998; Sächsisches Staatsministerium für Wirtschaft und Arbeit 1993, pp. 32-45):

- enterprise sector and public infrastructure: obsolete capital

stock;

- over-dimensioned (overstaffed) manufacturing sector while

service sector is underrepresented;

- business “landscape” characterized by inefficient

large-scale trusts (“Kombinate”) while SME were rare.

The division into East and West Germany has led to an economic structure in the GDR

including numerous distortions which hardly were competitive when the wall came down

(Boltho, Carlin & Scaramozzino 1999)

Case of German Unification is not only a case of economic integration; it is a case of

transformation from a centrally planned economy to a market economy, too.

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The structural break after the unification:

Introduction

-40,0

-30,0

-20,0

-10,0

0,0

10,0

20,0

1986 1987 1988 1989 1990

PercentYearly growth rates (in %) of important sectors

in East Germany

Energy and fuels

Chemicals

Machinery and vehicles

Electrical machinary and apparatus

Food products

Manufacturing

Source: DIW Berlin, IfW (1991): Gesamtwirtschaftliche und unternehmerische Anpassungsprozesse in Ostdeutschland. Erster Bericht, in: Kiel Discussion Papers 168, March, p. 4 (Primary Sources: Statistical Office of the GDR and Federal Statistical Office, FRG).

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Steps of transition

1) Monetary union (1st of July 1990)

2) Formal unification (3rd of October 1990)

3) Implementation of the West German legal framework

• (Re)establishment of 5 „new“ federal states

• Delegation of responsibilities to the regional level = principle of subsidiarity (more

responsibilities on the federal state level and the municipality level)

• Privatisation of state owned enterprises

4) Implementation of the West German social system (including the health system)

5) Comprehensive programmes for the renewal of public infrastructure

6) Comprehensive programmes for the stabilisation of the business sector = ensuring the

competitiveness of East German enterprises

• Support of investment = investment grants, tax revenues, loans

• Support of private R&D activities = grants

• Support for start ups

• Other support schemes

To ensure equivalent living conditions transfer payments from West to East Germany

within the period from 1991 to 2005 in an amount of more than 1 000 Billions of Euro

were conducted = mostly for the social insurance system (Blum et al. 2009)

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for Economic ResearchAchievements


What has been achieved?

Economic and social development in East Germany shows numerous positive changes:

• modernized infrastructure

large investment in the public research and education sector,

improvement of roads/highways and railroad tracks,

high standard in the health care system,

development of the urban wastewater treatment system,

• the modernization of the firms‟ capital stock

• Signs of re-industrialisation → manufacturing industries have been “motors” of economic

development since the mid 90ies

• the protection of the environment.

To sum up, living conditions in East Germany have improved substantially since 1990.

Nevertheless, some shortcomings still occur …

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East-Germany was not capable to catch up to West-Germany:

Shortcomings

0,0

20,0

40,0

60,0

80,0

100,0

120,0

%

Relative Productivity in East Germany (West Germany = 100%)Gross Domestic Product (Current Prices) per Employee

East Germany (including Berlin)

West Germany

IWHSource: Regional Accounts VGRdL 2011, calculation by IWH.

Why East Germany as a whole was not capable to catch up to West-Germany, although

transition has been finished?

Obviously, the effects of investment in physical capital are exhausted = capital investment

shows decreasing marginal effects

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Shortcomings

Lack of headquarters (Blum 2007)

0 20 40 60 80 100 120 140 160

Mecklenburg-Vorpommern

Thuringia

Saxony

Brandenburg

Saxony-Anhalt

Bremen

Saarland

Schleswig-Holstein

Rhineland-Palatinate

Berlin

Lower Saxony

Hamburg

Baden-Württemberg

Hesse

Bavaria

Northrhine-Westphalia

Number of enterprises

Locations of the 500 largest enterprises in Germany

Source: Deutschlands Große 500. DIE WELT-Rangliste der 500größten deutschen Unternehmen. G500 - 2010 - Onlinedatei Tabel, Calculation and illustration IWH.

IWH

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Shortcomings

0

10

20

30

40

50

60

70

Production High-grade services Other services Not attributable

%

Functional Structure of the Manufacturung Sector in East Germany and West Germany, Share of Occupation Groups (total employment

in the manufacturing sector = 100%)

East Germany including Berlin

West Germany

Sources: Heimpold 2009, p. 431, calculated by using statistics of the Federal Employment Agency (as of 30/06/2008) and mainly based on a classification by Bade 1987, especially pp. 194-196.

IWH

Lack of headquarters (Blum 2007) → Above average specialisation in production

activities while high-grade and other services are under-represented

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Shortcomings

Weak R&D activities in the business sector → Innovations will be seen as the most

important driver for long term growth

3,714,48

4,211,34

2,901,99

2,131,78

1,661,52

1,211,14

1,030,72

0,440,52

2,532,63

1,72

0,00 0,50 1,00 1,50 2,00 2,50 3,00 3,50 4,00 4,50 5,00

BerlinHessen

Baden-WürttembergHamburg

BayernNiedersachsen

SachsenRheinland-Pfalz

Nordrhein--WestfalenThüringen

BremenSchleswig-Holstein

Mecklenburg-Vorp.Brandenburg

Sachsen-AnhaltSaarland

DeutschlandWest Germany

East Germany including Berlin

%

Proportion of R&D expenditures (Turnover total = 100%) by German Laender, Mining and Manufacturing Sector, 2007

* R&D data explored by Stifterverband Wissenschaftsstatistik, including companieswith less than 20 employees, regional assignment according to thelocation of the R&D unit.** StBA, Fachserie 4, Reihe 4.1.1: "ProduzierendesGewerbe" (employment as of September 2007).

Source: Data: Kladobra et al., Wissenschaftsstatistik GmbH 2010, p. 32(and the sources mentioned there); diagram based on these data prepared by IWH.

IWH

Halle Institute

for Economic ResearchShortcomings


Potential regional

and interregional

production

networks in

Germany (2003)

Class Description

1

Regions with no

concentrated economic

activity

2 Regions with one

industrial cluster

3 Regions with more than

one industrial cluster

4

Regions with one

sectoral interdependency

of industrial clusters

5

Regions with more than one sectoral

interdependency of

industrial clusters

Potential regional networks Potential inter-regional networks

Sources: Statistical data of the Federal Employment Agency and StBA 2008, own calculation and illustration by IWH according to Titze et al. 2011.

Modern growth theory highlights the role of agglomeration economies for regional

development (for example Marshall 1920, Jacobs 1970, Porter 1990 and 1991).

Disrupted networks (Albach 1993), in the mid 90ies: lack of networking (DIW/IfW/IWH

1998, p. 27, Hornschild 1995, p. 25) = Absence of regional concentrated industrial

linkages → Inter-industry linkages promote the emergence of industrial clusters

Halle Institute

for Economic ResearchChallenges


• Fostering the emergence of industrial clusters

• Support of firms which are a key player in industrial clusters

• Emergence of firms which provide central functions = high-grade services

(R&D, controlling)

• Ensuring a stable economic growth with a shrinking and aging population - the

net migration rate from East to West Germany since 1989 has been in an

amount of about 2 Mio. people (Blum et al. 2010, p. 68).

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Albach, H. (1993): Zerrissene Netze. Eine Netzwerkanalyse des ostdeutschen Transformationsprozesses. – Berlin.

ArcelorMittal Eisenhüttenstadt (2011): official website, http://www.arcelormittal-ehst.com/content/pages/home.php?lang=de,

download 11.05.2011.

Bade, F. J. (1987): Regionale Beschäftigtenentwicklung und produktionsorientierte Dienstleistungen. Deutsches Institut für

Wirtschaftsforschung (Hrsg.), Sonderheft 143/1987. Duncker & Humblot: Berlin, pp. 194-196 (in German).

Blum, U. (2007): Der Einfluß von Führungsfunktionen auf das Regionaleinkommen: eine ökonometrische Analyse deutscher

Regionen. In: IWH Wirtschaft im Wandel 6/2007, pp. 187-194 (in German).

Blum, U.; Buscher, H. S.; Gabrisch, H.; Günther, J.; Heimpold, G.; Lang, C.; Ludwig, U.; Rosenfeld, M. T. W.; Schneider, L. (2010):

Ostdeutschlands Transformation seit 1990 im Spiegel wirtschaftlicher und sozialer Indikatoren. 2. akt. u. verbess.

Aufl., Halle (Saale). http://www.iwh-halle.de/d/publik/sh/dkompendium.pdf (in German).

Blum, U.; Ragnitz, J.; Freye, S.; Scharfe, S.; Schneider, L. (2009): Regionalisierung öffentlicher Ausgaben und Einnahmen – Eine

Untersuchung am Besipeil der Neuen Länder -. IWH-Sonderheft 4/2009, Halle (Saale).

Boltho, A.; Carlin, W.; Scaramozzino, P. (1999): Will East Germany become a new Mezzogiorno? In: Adams, J. and Pigliaru, F.

(eds.): Economic growth and change. National and regional patterns of convergence and divergence. Edward

Elgar: Cheltenham (UK), Northampton (MA), pp. 323-348.

Deutscher Bundestag (1998): 13. Wahrperiode. Schlussbericht der Enquete-Kommission „Überwindung der Folgen der SED-

Diktatur im Prozess der Deutschen Einheit“, Drucksache 13/11000 (in German).

Deutschlands Große 500. DIE WELT-Rangliste der 500 größten deutschen Unternehmen. G500 - 2010 - Onlinedatei.

DIW Berlin, IfW (1991): Gesamtwirtschaftliche und unternehmerische Anpassungsprozesse in Ostdeutschland. Erster Bericht, in:

Kiel Discussion Papers 168, March (in German).

Literature

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Literature

DIW/IfW/IWH (1998): Deutsches Institut für Wirtschaftsforschung Berlin; Institut für Weltwirtschaft an der Universität Kiel; Institut für

Wirtschaftsforschung Halle: Gesamtwirtschaftliche und unternehmerische Anpassungsfortschritte in

Ostdeutschland. Achtzehnter Bericht. IWH; Forschungsreihe 6/1998. Halle (Saale) 1998, S. 27.

Eisenhüttenstadt (2011): official website, www.eisenhuettenstadt.de, download 11.05.2011.

EKO Stahl GmbH [ed.] (2000): Einblicke – 50 Jahre EKO Stahl. 1. Auflage. Eisenhüttenstadt (in German).

Heimpold, G. (2009): Von der De-Industrialisierung zur Re-Industrialisierung: Sind Ostdeutschlands industrielle Strukturen

nachhaltig?, in: IWH Wirtschaft im Wandel 10/2009, pp. 425-434 (in German).

Hornschild, K. (1995): 3. Die Rolle der Politik beim Aufbau neuer Industriesstrukturen, in: Ministerium für Wirtschaft, Mittelstand und

Technologie, Referat Grundsatzfragen der Wirtschaftspolitik, Berichtswesen, Statistik (Hrsg.): Viertes

Industriesymposium Brandenburg (1995). Beiträge zur Bedeutung strategischer Allianzen im Land Brandenburg.

Eine Veranstaltung des Ministeriums für Wirtschaft, Mittelstand und Technologie Land Brandenburg und des

Deutschen Instituts für Wirtschaftsforschung Berlin, 14. Juni 1995, Cottbus. (= Schriftenreihe des MWMT – Band

VII), pp. 16-30 (in German).

Jacobs, J. (1970): The Economy of Cities, New York, Toronto.

Kladobra, A.; Grenzmann, C.; Kreuels, B., Wissenschaftsstatistik GmbH (2010): FuE-Datenreport 2010. Analysen und Vergleiche.

Forschung und Entwicklung in der Wirtschaft. Bericht über die FuE-Erhebungen 2007 | 2008. Unter Mitarbeit von

Ruth Hellmich, Herausgeber: Wissenschaftsstatistik GmbH im Stifterverband für die Deutsche Wissenschaft,

Essen, in:

http://www.stifterverband.org/publikationen_und_podcasts/wissenschaftsstatistik/fue_datenreport/fue_datenreport_

2010.pdf, accessed on 11/05/2011

Marshall, A. (1920): Principles of Ecomomics. An introductory volume, 4. Auflage 1952, New York.

Porter, M. E. (1990): The Competitive Advantage of Nations, London.

Porter, M. E. (1991): Nationale Wettbewerbsvorteile – Erfolgreich konkurrieren auf dem Weltmarkt, München (in German)

Halle Institute

for Economic ResearchLiterature


Regional Accounts VGRdL (2011): Arbeitskreis "Volkswirtschaftliche Gesamtrechnungen der Länder": Bruttoinlandsprodukt,

Bruttowertschöpfung in den Ländern und Ost-West-Großraumregionen Deutschlands 1991 bis 2010. Reihe 1,

Band 1. Erschienen im März 2011. Berechnungsstand des Statistischen Bundesamtes: August 2010/Februar 2011.

Stuttgart: Statistisches Landesamt Baden-Württemberg(im Auftrag der Herausgebergemeinschaft), in:

http://www.vgrdl.de/Arbeitskreis_VGR/tbls/R1B1.zip, accessed on 11/05/2011.

Sächsisches Staatsministerium für Wirtschaft und Arbeit (1993): Wirtschaft und Arbeit in Sachsen. Bericht zur wirtschaftlichen Lage

im Freistaat Sachsen, Dresden, März (in German).

Statistics of the Federal Employment Agency.

StBA, Fachserie 4, Reihe 4.1.1: "Produzierendes Gewerbe" (employment as of September 2007), cited in: Kladobra, A.; Grenzmann,

C.; Kreuels, B., Wissenschaftsstatistik GmbH (2010): FuE-Datenreport 2010. Analysen und Vergleiche. Forschung

und Entwicklung in der Wirtschaft. Bericht über die FuE-Erhebungen 2007 | 2008. Unter Mitarbeit von Ruth

Hellmich, Herausgeber: Wissenschaftsstatistik GmbH im Stifterverband für die Deutsche Wissenschaft, Essen, p.

32, in:

http://www.stifterverband.org/publikationen_und_podcasts/wissenschaftsstatistik/fue_datenreport/fue_datenreport_

2010.pdf, accessed on 11/05/2011.

StBA, Fachserie 18, Reihe 2 (2008): Volkswirtschaftliche Gesamtrechnungen. Input-Output-Rechnung. Erschienen am 20. April

2007, korrigiert am 7. Mai 2008.

Titze, M; Brachert, M.; Kubis, A. (2011): The Identification of Regional Industrial Clusters Using Qualitative Input-Output Analysis

(QIOA), in: Regional Studies, Vol. 45 (1), pp. 89-102.

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Backup slides

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Production

of hot metal

Ore (S, BR,

RUS, …)

Coke (PL, …)

Lime (PL, …)

Production

of steel

Blast furnace

= built in the 50ies,

modernized in the

90ies

Converter

= built in the early

80ies

Production

of hot-rolled

strips

Hot strip mill

= built in the mid

90ies

Production

of cold-rolled

strips

Cold strip mill

= built in the 60ies

Vehicles„

manufacturers

Machineries„

manufacturers

…

The technological process of an integrated metallurgical plant

Source: Own illustration.

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Introduction

31

12

1211

10

24

Sub-branches' share on the East German manufacturing sector (in %) in 1990

Machinery and vehicles

Chemicals

Food products

Energy and fuels

Electrical machinary and apparatusOther*

* Light industry, Metals, Construction, Textiles, Water

Source: DIW Berlin, IfW (1991): Gesamtwirtschaftliche und unternehmerische Anpassungsprozesse in Ostdeutschland. Erster Bericht, in: Kiel Discussion Papers 168, March, p. 4 (Primary Sources: Statistical Office of the GDR and Federal Statistical Office, FRG).

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Shortcomings

9,708,12

7,116,93

5,944,85

4,444,14

3,563,213,21

2,762,202,15

1,711,27

5,255,43

3,99

0,00 2,00 4,00 6,00 8,00 10,00 12,00

BerlinHessen

Baden-WürttembergHamburg

BayernNiedersachsen

SachsenRheinland-Pfalz

Nordrhein-WestfalenThüringen

BremenSchleswig-Holstein

Mecklenburg-Vorp.Brandenburg

Sachsen-AnhaltSaarlandGermany

West GermanyEast Germany (including Berlin)

%

Proportion of R&D staff* (number of employees** total = 100%) by German Laender, Mining and Manufacturing Sector, 2007

Source: Data: Kladobra et al., Wissenschaftsstatistik GmbH 2010, p. 32(and the sources mentioned there); diagram based on these data prepared by IWH.

IWH

* R&D data explored by Stifterverband Wissenschaftsstatistik, including companieswith less than 20 employees, regional assignment according to thelocation of the R&D unit.** StBA, Fachserie 4, Reihe 4.1.1: "ProduzierendesGewerbe" (employment as of September 2007)

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Shortcomings

Modern growth theory highlights the role of agglomeration economies for regional

development (for example Marshall 1920, Jacobs 1970, Porter 1990 and 1991).

The character of potential production networks – the example of Nuremberg (2003)

63

26.1

31

66

31

Nuremberg (city)

Fuerth (city)

Schwabach

Roth

Erlangen-Hoechstadt

Potential ntermediate input flow

Erlangen

Fuerth (district)

Nuremberg (district)

24.4

40.1, 40.3

27.4

19

27.522.2, 22.3

32

CPA Bezeichnung

19 Tanning and dressing of leather

22.2 - 22.3 Printing

24.4 Pharmaceuticals

26.1 Glass and glass products

27.4 Basic precious

27.5 Casting of metals

31 Electrical machinery

32 Communication equipment and

40.1, 40.3 Electricity and Steam supply

62 Air transport

63 Supporting transport activities

66 Insurance and pension funding

Legend

62

Notation

Source: Own calculation and illustration.Potential intermediate input flow

East Germany‟s Economy on the Path from Transition to

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