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Economic Development

East Germany 20 Years After Reunification

After the Berlin Wall came down 20 years ago, the former East Germany's society and economy had to be reimagined. All told, about 14,000 companies in East Germany were closed or privatized in the five years after German reunification, resulting in the loss of about 4 million jobs. Today, the economy and business culture of the former East Germany offers a mixed picture. Cities like Berlin, Dresden, and Leipzig have developed strong entrepreneurial cultures that encourage technology startups and small business ventures. Employment levels are steady in the dynamic university town of Jena despite the recession. But many rural areas suffer from depopulation and high unemployment. Eastern States Close In on ParityThe region overall has made considerable strides over the past two decades. Government data show that gross national product per person in the east rose to 71% of that of a westerner in 2008, compared to 67% in 2000. Disposable income increased from 60% of the western level in 1991 to 78.6% in 2007, according to a report by the Munich-based Institute for Economic Research. Unemployment is now at 12.3%—still far higher than the 6.9% rate in the former West Germany but greatly improved from its peak level of 20% in 2003. In fact, Germany's formerly communist eastern states need just 10 more years of economic development to match the output of the poorest western states, according to a finding released Nov. 3 by the IW economic institute in Cologne. The study estimated the eastern states were soon set to catch the poorest western states of Lower Saxony and Schleswig-Holstein. The eastern state of Thuringia, for example, has seen its manufacturing base grow by an average of 10% each year for the last two decades. The manufacturing base for the state of Brandenburg, which surrounds Berlin, has increased by an average of 8% each year. Eastern German states also have managed a "stronger resistance to the [economic] crisis," according to a government report released in June. The reason is that the area has a higher number of small and medium-size companies that are able to react more flexibly to the challenges posed by the recession. Also, compared with western Germany, companies in the former East are far less dependent on exports. Jena: A Technology HotbedOne of the region's biggest successes is the university town of Jena, which has developed into a hub of innovation and entrepreneurial activity. Its city center, in which German literary luminaries like Johann Wolfgang von Goethe and Friedrich Schiller once lived, is tidy and well preserved. A 13th-century town hall and 16th-century Gothic church surround a medieval market square, quaint narrow streets, and a botanical garden. At night, French bistros, Irish pubs, and German restaurants are filled with students, university faculty, and young businesspeople. Jena also is the home of several up-and-coming eastern German technology companies such as Asphericon, a maker of lenses; Biolitec (BIBG.F), a developer of diodes and optical fibers; and Jenoptik (JENG.DE), a world leader in laser diodes whose roots trace back more than a century. One of Jena's brightest tech stars is e-commerce software provider Intershop Communications (ISHGk.DE), which counts 300 clients around the world including such familiar names as Sun Microsystems (JAVA) and Hewlett-Packard (HPQ). Another hotbed of technology is Dresden, where German chipmaking giant Infineon Technologies (IFXGn.DE) has a silicon wafer factory and U.S. chipmaker Advanced Micro Devices (AMD) built its most state-of-the art microprocessor plants. And Berlin is fast becoming a favorite locale for software entrepreneurs behind startups such as virtual world Twinity and online shopping site Rural Areas LanguishStill, the palpable energy in spots like Jena, Dresden, and Berlin contrasts sharply with more rural and isolated areas of the former East Germany. Even in well-preserved towns like Gorlitz on the Polish border, some neighborhoods juxtapose boarded-up, crumbling buildings with functioning shops and homes. Approximately €1.5 trillion ($2.2 trillion at current exchange rates) in subsidies since reunification haven't been able to solve nagging problems of lower productivity, wages, and per capita wealth in eastern Germany's poorer areas. Given the difficulties, some inhabitants of the former East are becoming nostalgic for life before the fall of the Berlin Wall. According to a poll by the Sozialverbund Volkssolidaritaet conducted in June, nearly 50% agree with the statement, "The GDR [German Democratic Republic] had more good sides than bad sides. There were some problems, but life was good there." Another 8% agreed that "The GDR had, for the most part, good sides. Life there was happier and better than in reunified Germany today." Peter Kaiser, project manager in the Bremen office of Swiss consulting firm Prognos, says the key to sustaining the economy in the former East—and in Germany in general—will be to follow in the footsteps of towns like Jena. In other words, the region needs "tech-intensive and very knowledge-based industries and services," he says. That will require a well-educated population, a steady stream of young people pursuing management and engineering, and continued development of an entrepreneurial culture. For a look at some of the brightest stars in eastern German business, check out our slide show.
Herbst is a reporter for BusinessWeek.

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