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Coping with Uncertainty: European labour markets and the politics of social reform Institutional change, transformation and development: the case of the.

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Presentation on theme: "Coping with Uncertainty: European labour markets and the politics of social reform Institutional change, transformation and development: the case of the."— Presentation transcript:

1 Coping with Uncertainty: European labour markets and the politics of social reform Institutional change, transformation and development: the case of the East German regions Uwe Blien Institut for Employment Research (IAB) & University of Bamberg

2 London, 6th Nov. 2009 2 20 years after the fall of the Berlin Wall: an assessment of the transformation process in Eastern Germany -Transformation was reached in one pace with unification -In no other country the transformation process was done in such a fast and drastic way as it was in Eastern Germany (“big bang strategy“) -This lead to great economic problems (1991: rate of BSP change in Eastern Germany: -31.4) -The consequences have been visible until today

3 London, 6th Nov. 2009 3 Steps of German unification - During autumn 1989 repeated demonstrations and protests against the ruling SED party - Increasing numbers of refugees left the GDR by neighbouring states (Chechoslovakia, Hungary) - The power of the ruling group in the GDR was weakened step by step - Opening of the Berlin Wall at 9 Nov. 1989 “by accident“ - Suggestion of introducing the D-Mark as currency in the GDR by Chancellor H. Kohl at 7 Feb 1990

4 London, 6th Nov. 2009 4 Steps of German unification (II) - Economic and social union between West and East Germany at 1 July 1990 - Currency union at 2 July 1990 (exchange rate 1 to 1 for wages, 1 to 2 for bank accounts) - Unification at 3 October 1990 by accession of the regions of the New Federal States to the Federal Republic of Germany

5 London, 6th Nov. 2009 5 Consequences of the currency union for the economy of the GDR - The economy was nearly closed before and then – in one step – opened up to the economy in the West and to the world market - Productivity in the East was only about 38.6 % of the West - Production in the East was not profitable, it could only be sustained as far it was subsidized by the state. - Unemployment increased in the following

6 London, 6th Nov. 2009 6 Reasons for the high speed of institutional change and of unification - Fear that the “window of opportunity“ will be closed again soon - in Western Germany: Fear that many people could leave the East and move to the West (and increase unemployment) - Impatience about the outcomes of the whole process, especially in the East - Breakdown of confidence in the representatives of the state in the East - Dynamics of the political system (pressure of elections)

7 London, 6th Nov. 2009 7 Further reasons for realizing the currency union - In the East the D-Mark was regarded not only as the symbol, but also as the reason of the Western living standard – not regarding all the conditions of economic life - This was due to the “fetish character of money“ (Marx) - Any experience with the mechanisms of a market economy was missing - In the West the introduction was regarded as appropriate to make the unification process irreversible

8 London, 6th Nov. 2009 8 Euphoria about unification - neglect of any economic problems - The unification will lead to “flourishing landscapes“ (H. Kohl) - Problem of high wage increases was regarded in moral terms: Why should someone in the East earn less someone in the West? Is he or she not a German too? - There was no resistance of firms and employers associations against wage increases, thus, wages doubled - The conditions of a market economy were disregarded - The consequence was a big economic crisis with alarming proportions

9 London, 6th Nov. 2009 9 Western Germany productivity labour cost productivity Eastern Germany Productivity and Labour Cost

10 London, 6th Nov. 2009 10 Federal Republic of Germany Western Germany Eastern Germany BSP growth rates

11 London, 6th Nov. 2009 11 Industry construction Quarterly growth rates

12 London, 6th Nov. 2009 12 Eastern Germany Western Germany Unit labour cost

13 London, 6th Nov. 2009 13 Properties of the crisis in East Germany - Employment decreased from over 10 Mill. (1989) to just over 6 Mill. (1993) - Unemployment increased to over 1.2 Mill. - Many people were hidden unemployed in measures of labour market policy - The firms in Eastern Germany were privatized by the „Treuhandanstalt“ (Trust Institution), which left a debt of over 200 000 Mill. €.

14 London, 6th Nov. 2009 14 Meanwhile, 20 years later the Eastern German regions are quite “normal“ German regions – however severe problems remain - Institutions are the same as they are in the West - Eastern wages stagnate of about 75 % of the wages in the West - The unemployment rate is still about double the one of the West - There are only faint signals of a convergence process

15 London, 6th Nov. 2009 15 Yearly unemployment rates

16 London, 6th Nov. 2009 16 Unit Labour Costs

17 London, 6th Nov. 2009 17 Eastern Germany Wages, productivity and unit labour costs

18 London, 6th Nov. 2009 18 Manufacturing in Eastern Germany Wages, productivity and unit labour costs

19 London, 6th Nov. 2009 19 unter -5,0 -5,0 bis unter 5,0 5,0 bis unter 15,0 15,0 bis unter 25,0 25,0 und höher Vorjahresveränderung in %: Stralsund -7,0% Eberswalde -9,2% Bremerhaven -8,0% Memmingen +70,3% Rottweil +63,5% Villingen- Schwenningen +66,9% Deutschland: +7,9% Growth rateUnemployment rate unter 3,0 3,0 bis unter 6,0 6,0 bis unter 9,0 9,0 bis unter 12,0 12,0 und höher Arbeitslosenquote in %: Deutschland: 8,1% Freising 2,9% Ingolstadt 3,0% Donauwörth 3,1% Sangerhausen 17,2% Altenburg 15,6% Neubrandenburg 15,6% Regional Distribution and Change of Unemployment

20 London, 6th Nov. 2009 20 How can the remaining problems be explained? - Informal institutions might be effective which slow down a covergence process - The firms in the East are often only branch-plants; they lack development capacities - Social networks to the markets are missing The result is an economy with a low export rate (about 30 %, compared to over 40 % in Western Germany)

21 London, 6th Nov. 2009 21 Approaches of Krugman‘s new Economic Geography are suggested as explanation - East Germany is the “periphery“ of the West - Market potential is lower in the East: concentration of population is lower and the major agglomerations are in the West - Today, the traffic network between both parts of the country is quite good - Therefore, it might be profitable to produce (only) in the West (Brakman, Garretsen 1993)

22 London, 6th Nov. 2009 22 An extension, introducing the labour market - A reaction on the labour market problems in the East is out- migration (1.8 million people) - it has a direct negative effect on unemploment - it also reduces the market potential of the regions and has an indirect positive effect on unemploment - The direction of the net effect is open (Suedekum‘s 2005 extension of New Economic Geography by the Wage Curve)

23 London, 6th Nov. 2009 23 Conclusion - The big bang transformation of Germany was unavoidable, due to reasons outside the economic sphere - It did not facilitate a convergence process but led to stagnation - The more recent developments of the East German regions show good values of some fundamental economic indicators, but no improvement in the labour market - The latter might be changing due to recent events

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