ZEW President Franz on Eastern Reconstruction

This piece appeared July/August 2004 edition of the ZEWnews.

Successful economic policy usually begins with the courage to be open and transparent. This certainly applies to the reconstruction of East Germany.

Firstly, it is important to take great care not to talk down the development going on in East Germany. Since 1990 great things have been achieved in many different areas of the economy there, including successful developments and immense progress made in infrastructure, urban development and environmental protection. Many a West German mayor might be hit with a sense of melancholy comparing East Germany to their own town in the West. Unfortunately, these and many of the other wonderful achievements Eastern reconstruction are now taken for granted or receive only passing attention.

Secondly, there is reason to believe that the development of East Germany will continue to progress insofar as economic problems in West Germany and the state of the East German construction industry, which is shrinking at a slower and slower rate, will currently allow it. In other words, Eastern reconstruction is being accelerated by the much needed revitalisation of the forces driving growth in Germany, something which the new Federal President Kohler recently made an urgent call for. Viewed in this light, there is less and less need for a Special Representative for East Germany; what we need instead is a bold and smart growth policy which will improve the offer conditions here in Germany and ensure that collective bargaining parties maintain an employment-friendly stance on wage growth.

The third aspect to consider is the bitter fact that not all of the East German regions can participate in the reconstruction process to the same extent. This prospect is relatively harmless for the parts of East Germany well-known for their stunning landscape since they can realise their potential through opening themselves up to tourism. This will be a far more bitter pill for those regions which – to use a rather twee euphemism – have gone through passive reconstruction. In other words, these regions, to put it plainly, are write-offs in terms of their economic development and instead have to be designated as vast conservation areas. What is certain is that we should not dismiss the personal hardships faced by those affected and deny them support to help them adapt. However, politicians must summon up the courage to tell people that delusions will not help development in East Germany to progress. It may be comforting to tell ourselves that almost every country has its own Mezzogiorno in some form or another and that this does not reflect a permanent state of affairs. Economic history offers us plenty of examples of the economic rise and fall of various regions. At the same time, this does little to help those currently affected by an economic downturn.

Fourthly, advisers of all stripes should try to counter the conception among the general public that there exists a perfect pathway to prosperity in East Germany. To put it in somewhat exaggerated terms, regional economics has always concerned itself with countless analyses to figure out why one particular regional funding programme or another is successful, ineffective or even counter-productive, without ever coming to any general conclusions. Naturally, there may be any number of good reasons to prefer targeted funding of growth poles or clusters rather than blanket subsidies. But the question of how these target areas are to be identified and funded is just as unclear as who will actually assume the responsibility for this task. It is absurd to think that every technology park we see today could be tomorrow’s Silicon Valley. Just as delusional is the idea that the dead-weight effects of funding measures can be completely eliminated or that they are specific to East Germany. So-called “free-riders” can be found everywhere.