Pains of German Unification; H. Sennholz

377 Pains of the German Unification by HansF: Sennholz E astern Germany is lingering in deep depression. Of all the struggling former Soviet satellites, it was expected to suc ceed most quickly.At a stroke, on July 1, 1990, the German mark became the common currency, opening the doors to one of the world's richest sources of investment capital. The West German government stood by with hundred-billion-mark grants and credits, and millions of fellow citizens were eager to help in any waypossible. Yet,despite these extraordinary advantages, East Germans are suffering probably the deepest depression in East ern Europe. In 1990 their gross national product dropped by 14 percent, and almost 30 percent of their 9~ million workers are either unemployed or working short-time. According to many studies, this figure is likely to rise further in the coming months. The pains of unemployment threaten to render the dream of unification a political and economic nightmare. Integrating two such unequal econo mies-an ossified command system with a pros perous market orderis an unprecedented task.

Even under ideal market conditions, it would have taken many months of adjustment to merge the two parts into one homogeneous whole. Unfortu nately, the German government compounded the difficultiesby imposing its strictures on the adjust ment process. It imposed the costs and regulations of one of the most expensive welfare states on the newcomers, thereby paralyzing all but a few highly productive enterprises. The principal reason for the East German depression is the rapid rise in East German labor Dr. Sennholz heads the Department of Economics at Grove City College in Pennsylvania. costs. Despite massive regional unemployment, wages are rising with astonishingvigor, driven by the most generousunemployment compensation system in the world. It pays an average worker 68 percent ofprevious earningsfor two years. Encour aged by vocal labor leaders and thoughtless politi cians, workers expecting a shutdown of their decrepit facilities demand immediate raises so they can draw the highest possible benefits when their plants finallyclose. As labor costs are pushed far beyond labor productivity, jobs disappear at astonishing rates.

East Germans are longingfor wage equalization with West Germans. Collectivebargaining con tracts call for equal pay by 1994 in a number of industries such as metallurgy, electrical engineer ing, and retailing. But it is unlikely that one in 10 East German enterprises will stay afloat in com petitive markets. With labor productivity at less than one-half of that in West Germany, by 1994 many more East Germans are likely to subsist on unemployment compensation. For the moment, non-dismissal agreements and provisions govern ing short-time working, financed by large West German subsidies, are holding back the worst. PrivatizationEffortsHindered Excessive labor costs in eastern Germany may also explain why privatization of state enterprises is proceeding so slowly.In Poland and Czechoslo vakia, governments are planning to give away most state-owned enterprises, using vouchers made available to all citizens. In eastern Germany, in contrast, the Treuhandanstalt (Trusteeship Authority) is supposed to sell some 8,000 state 378 THE FREEMAN • OCTOBER 1991 enterprises at equitable prices. Until now it has rejected most bids for being too low and not meet ing its onerous labor conditions. Unfortunately, it makes matters worse: for the protection of eastern workers it seeks to extract expensive employment and wage guarantees from potential buyers, which obviously depresses the price offered for an enter prise, which in turn causes the Treuhandanstaltto reject the offer. In the end, few, if any, government enterprises are sold. They are likely to be shut down and their workers discharged when the west ern subsidies run out.

Few western companies have established or plan to establish plants in the east. East German labor is just too expensive at present rates. The sit uation is compounded by bureaucratic logjams and disputes over property rights. Even if the Trusteeship Authority were to offer a facility at market prices, which would be a rare exception, it might be enjoined from doing so by litigation initi ated by the former owners. Thousands of victims of Communism are pressing claims for compensa tion or return of their property in the courts of law; the Trusteeship Authority is opposing these claims, clinging to property as if it were its own. Other factors compound the employment situ ation, which is leading to growing social tension and political uncertainty. When the two Germa nies merged into one and migration barriers were lifted, the two parts formed one comprehensive labor market. According to all principles of eco nomics, West German wage rates should have fall en and East German wages should have risen as eastern labor moved west and western business moved east until, in a few years, both parts would have been equal in labor productivity and 'income.

A small drop in western labor costs would have raised the demand for labor sufficiently to absorb the influx of workers from the east. But instead of reducing western labor costs, powerful unions have managed to boost costs by about 6 percent since unification. This increase alone would have tended to raise unemployment. For the East Ger mans it closed many doors to employment in the west and forced them to stay at home subsisting on unemployment compensation. Another factor aggravating the employment sit uation is the massive influx of Eastern Europeans. With the disintegration of the Communist empire and the dismantling of many migration barriers, millions of Eastern Europeans are seeking a new beginning in western Germany. During 1989some 700,000immigrants arrived in West Germany; in 1990 this number exceeded one million, and is likely to rise further during 1991 and the coming years. The movement at first eased the acute shortage of skilled workers in West Germany but now is compounding the employment difficulties of many East Germans.

Rootsof Unemployment Employment and unemployment always are a function of labor costs, not of the costs of equip ment. The cause of the German dilemma is not East Germany's poor quality of plant and equip ment. Millions of workers throughout the Com munist world and in less developed countries around the globe earn a livingwith similar or even less efficient facilities. But they do not agitate for policies that will price themselves out of employ ment because they have no one to support them. Inferior equipment keeps labor less productive; it doesn't render it completely unproductive and doesn't force it to be idle. It is foolish to blame old equipment for one's unemployment. The depression was not caused by the terms of monetary unification, as Karl Otto PoW,president of the Bundesbank, wants us to believe. In prepa ration for monetary union he had proposed an exchange rate limit of one D-mark for two rather worthless East-marks. Chancellor Helmut Kohl insisted on a parity of exchange, arguing that the two-to-one rate would penalize eastern savers and pensioners and encourage eastern workers to move westward. In reality, both exchange rates were political rates rather than purchasing-power market prices, which before the union had stood at seven-to-one. Both rates in effect included gen erous gifts to every East German, especially the savers and pensioners. But monetary gifts by themselves don't directly affect the price of labor, which is determined by the productivity of labor.

East German labor could have priced itself out of employment as easily at a two-to-one rate of exchange as it did at the one-to-one rate. The push for wage equalization would have been the same. Some observers blame the eastern German depression on the disintegration of trade with for mer Eastern-bloc countries, such as Poland, Czechoslovakia, Hungary, Romania, and Bulgar ia. This was the region that previously had bought PAINS OF THE GERMAN UNIFICATION 379 seven-tenths of all East German exports. The dis integration of the old trade pattern obviously necessitates painful readjustments, which makes the need for flexibility and adaptability all the greater; unfortunately, the strictures of labor laws and regulations render the necessary adjustments rather difficult. Many Germans and most people abroad are convinced that Germany willsucceed in overcom ing its difficulties and, in the end, emerge more prosperous than before. They point to a few rays of hope such as the large and still growing number of new businesses that emerge every day. Since the beginning of 1990, some 400,000 new businesses have been registered. The main focuses of these new enterprises are the craft trades and the service industries. Here the first stirrings of the recovery process are clearly visible.

The new stirrings may contain an answer to the economic dilemma. In years to come they may develop into the mainstream of economic produc tion while the Treuhandsector is bound to shrink in direct proportion to the decreasing subsidies it manages to extract from the body politic. In the meantime, however,the deep depression and mass unemployment in eastern Germany are bound to leave their mark not only on the economic well being of millions of victims but also on their polit ical thoughts and prejudices. Many may argue that, under Communism, they at least had jobs. Under capitalism, or what they now believe to be "capitalism," they feel rejected and forced to sub sist on alms from the West. A resentful East Ger man population may even turn against the new order and cast its lot with the foes of democracy and the privateproperty order. D 380 China'sEntrepreneurs: Keeping the Faith After Tiananmen by Sheila Melvin T he life of an entrepreneur in the People's Republic of China has never been an easy one. Aside from all the general problems faced by entrepreneurs worldwide and the specific problems faced by entrepreneurs operating within the confines of a Communist country, China's entrepreneurs must somehow cope with the unpredictable political winds that blowout of Beijing and sweep across the nation.