Manufacturing in East Germany since Unification restructuring and actual role in unified Germany

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1 Manufacturing in East Germany since Unification restructuring and actual role in unified Germany Alexander Eickelpasch, German Institute for Economic Research (DIW Berlin), Berlin, Germany KDI SCHOOL of Public Policy and Management, Field Trip to Germany Berlin, 29 August 216

2 1 Restructuring of East German manufacturing sector Production employment and hours worked in East German manufacturing, 1989 = (1st half-year) 199 (2nd half-year) 1991 (1st half-year) Inefficient manufacturing sector in GDR Unfavourable starting conditions Collapse of production mid 199 to mid 1991 Stabilisation of production and employment by state support Production Employees Hours worked per employee Source: B. Görzig: Produktion und Produktionsfaktoren in Ostdeutschland, Berlin

3 1 Restructuring of East German manufacturing sector Stock of companies of Treuhandanstalt ( Trust Agency ) THA Strategy: Privatise quickly, reconstruct determinedly, and close gently (Rohwedder) End of 1994: 1 entities were privatized 37 entities closed 3

4 1 Restructuring of East German manufacturing sector East German Industrial Companies and Employment by Ownership Status and Origin, 1991 to 1998, share in % Ownership status Summer 1991 Private companies of which: Independent companies Companies owned by west German or foreign companies of which: Privatised companies x* 48** x* 36** 55 6 Reprivatised companies x* x* Companies in private hands prior to 199 x* x* Companies founded after 1989 x* x* Companies owned by the Treuhandanstalt or its successor organisation Companies, total *Inadequate number of cases. **Including reprivatised companies. Sources: DIW surveys conducted in summer 1991, summer 1992, winter 1993/94, spring 1995, autumn 1996 and start of Fast change in ownership by privatisation and start-up companies Termination of privatisation end of 1994 Companies Summer 1992 Winter 1993/94 Spring 1995 West German and foreign companies important investors Summer 1991 Employees Summer 1992 Winter 1993/94 Spring

5 1 Restructuring of East German manufacturing sector Gross value added in selected branches in East German economy, price-adjusted, chain-linked, Index 2 = Construction Manufacturing Service activities Dynamic expansion of production since 1992, also compared to service activities and construction Since mid 2 similar to West German manufacturing Share on East German economy (1992: 11.9%, %, 214: 15.2%) Source: Working group Regional accounts, Calculations by DIW Berlin. 5

6 1 Restructuring of East German manufacturing sector Gross value added, labor productivity (Index 2 = 1), and wage share (% value added) in East German manufacturing Value added Value added West Germany Value added per employee Wage share Source: Working group Regional accounts, Calculations by DIW Berlin. Growth in labour productivity Compensation of employee per hour and wage share (wages % of value added) declined Increase in production faster than in West German manufacturing Increase in contribution to German production (1991: 6.3%, 2: 9.4%, 214: 1.3%) 6

7 2 Role of East German manufacturing in unified Germany Productivity, wages and unit labor cost in manufacturing, West = Reduction of labor cost disadvantages until 2 Adjustment to West German productivity Still productivity gap (214: 7.1%) Labor productivity East Germany % West Germany Compensation per employee East Germany % West Germany Unit labor costs East Germany % over West Germany Source: Working group Regional accounts, Calculations by DIW Berlin. 7

8 2 Role of East German manufacturing in unified Germany Employees in manufacturing per capita East Germany West Germany Employment growth since 25 Increase of share on total manufacturing employment (2: 12.7%, 214: 14. %) Increase in size (employment per capita), but still lower than in West Germany Source: Working group Regional accounts, Calculations by DIW Berlin. 8

9 2 Role of East German manufacturing in unified Germany Employees in East and West Germany by branches, in % East West Sources: Data on employees subject to social insurance contributions, calculations by DIW Berlin. Other branches Other transport equipment Motor vehicles Mechanical engineering Electrical products Data processing equipment, electronic and optical products Chemical and pharmaceutical products Productivity gap mainly due structural differences in manufacturing: Branches with above average productivity less represented (East: 39.2% of employment, West: 51.%) However, growth faster than in West Germany (East: 5.1%, West: 1.9%) 9 9

10 2 Role of East German manufacturing in unified Germany Exports % of turnover 5 East Germany West Germany Export gap Expansion of exports, incline of export quota Share on all German Exports 8.2% (214) Export quota (37%) still lower than in West Germany (5%) Gap in most branches Source: Federal Statistical Office, calculations by DIW Berlin. 1

11 2 Role of East German manufacturing in unified Germany R&D personnel as percentage of employees 213 Manufacturing total 29 Manufacturing total 213 R&D intensive branches Chemical products Pharmaceutical products Data processing equipment, electronic, optical and electrical products Mechanical enigneering Vehicle manufacturing Other branches East Germany West Germany R&D gap Growth in Personnel and Expenditures 29 to 213, weaker than in West German manufacturing R&D intensity lower than in West Germany (East: 2.4% West: 4.9%) Sources: Donors Association for German Science, data on employees subject to social insurance contributions, calculations by DIW Berlin. 11

12 2 Role of East German manufacturing in unified Germany Employees in East and West Germany in manufacturing by size of plants, in % East West Sources: Data on employees subject to social insurance contributions, calculations by DIW Berlin. 5 and more Headquarters of large companies missing Large companies are less represented (East: 33.2% of employment in plants with 25 and more employees, West: 5.2%). However, growth faster in larger plants 12 12

13 2 Role of East German manufacturing in unified Germany Employees in manufacturing per capita by Länder Concentrated in areas with tradition in manufacturing and higher population density Larger than in some West German regions Larger than in some other EU countries (France, Spain, UK, etc.) Source: Working group Regional accounts, Calculations by DIW Berlin. 13

14 3 Conclusions Restructuring of East German manufacturing sector Fast privatization combined with investment guarantees, attraction of external investors, decline unit labor costs, qualified labor Exchange rate 1:1, high labor costs at the beginning Role of East German manufacturing in unified Germany Productivity gap because of structural differences Above average branches (R&D and export oriented) less represented Large companies less represented Strong regional differences in East and in West Germany Further development dependent on tradition in manufacturing and other favorable locational conditions 14

15 Thank you very much for your attention Alexander Eickelpasch aeickelpasch@diw.de DIW Berlin German Institute for Economic Research Mohrenstraße 58, D-1117 Berlin, Germany 15

16 Costs of reunification State Support for East Germany (Mrd. DM) total 1991 to 1998 Total support of which: Central government West Germany state and local government "German Unity Fund European Union Social insurance funds of which: Social benefits Subsidies Investment General financial support (unclassifiable) Central government revenue in eastern Germany Net support, total memo item: Treuhandanstalt deficit Estimates on the basis of planning figures.- 2 Unemployment insurance and pension insurance funds. Source: Bundesbank. 16