Skip to main content

Of Collosal Political Errors - East German Industrial Development, Post Reunification

These days, I don't read the newspaper, never watch TV and just sometimes pop-in news websites for current affairs. But I do read the Time magazine fairly regularly. This week, the cover-story was how economy-managers worldwide could take cues to solve the current global recession from Germany's experience of managing the economic integration of the earlier Eastern and Western Germanies.
Those of us who live in Germany know that there are still many unresolved problems in the East such as out of proportion unemployment, aging population (emigration of youth), industrial under-development etc.
Time's 18 May, 2009 article mentioned one collosal error made at the time of planning and executing the German Reunification under Chancellor Kohl back in 1990 - that of exchanging the East and West German Marks at par, one of one for each, while the real value of the Eastern Deutsche Mark (DM) was only a fourth of it's western counterpart. This automatically over-valued east-German labor, assets etc, thus losing an important natural competitive advantage for luring investors from West Germany, as well as all over the world, into setting up enterprise in this newly included part of the nation.
As a direct effect, industry in the East didn't develop naturally, rather solely (and minimally) based on economic stimulus granted by the federal government from tax-coffers (paid and maintained for the most part by West Germany).
Interestingly, further east, Czech Republic, Poland etc, prospered much better by keeping their currencies under-valued and taking advantage of the natural advantage low-valued assets and labor offer.
There might be some clues here for economy planners who seem to be pinning hopes on "pumping" trillions into enconomies worldwide.