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The Worst Is Finally Over In Eastern Germany


International Business: GERMANY

THE WORST IS FINALLY OVER IN EASTERN GERMANY

Every day, grocery shops throughout eastern Germany get fresh salads shipped to them from Dresden food processor Feinkostfabrik Dr Doerr. The 62-year-old company had moldered under communist ownership until Udo Doerr, son of the founders, bought back the name in 1990, borrowed to build a new factory, and pushed sales ninefold, to $12.9 million, this year.

The Doerr family's comeback is one sign among many that in eastern Germany, the worst is finally over. After a five-year crash course in capitalism, complete with traumatizing layoffs and factory closings, the region's economy is blooming at a 9% growth rate. Exports have started rising after a steady slump, and nearly 500,000 new entrepreneurs are beginning to lay the foundation for a new Mittelstand to add to Germany's small-business sector.

STOPGAP TAX. That's not to say the conversion is complete. The official unemployment rate, at 14.2%, is still frighteningly high. Transfer payments from western Germany will top $100 billion in 1995. To keep a cap on the $36 billion deficit, the government is even imposing an unpopular income tax surcharge until payments to the east dwindle.

But joblessness has also stopped its rapid climb. And net subsidies from the west, huge as they are, will decline 16% this year from their peak in 1994. "The transformation phase is over," says Karl Brenke, economist with the German Institute for Economic Development. "Now we need a healthy buildup."

Although that buildup could take another 10 years, the needed infrastructure is falling into place. Highways are being rebuilt and extended. Leipzig and Dresden are beginning to resemble the metropolises of Frankfurt and Munich. Services such as banking and auto leasing are growing rapidly, from 7% of gross domestic product five years ago to 25% now. Household income is now three-quarters that of the west. "Our self-confidence is growing," says Heinz Wiltsch, president of his own consulting company in Potsdam.

Private investment is also showing signs of life. Siemens is spending almost $2 billion on a center for microelectronics research and production near Dresden. Siemens expects its ultramodern chip factory to employ up to 1,500 people directly and create another 3,000 local jobs for suppliers and services. On a smaller scale, Wolfgang Gries, a physicist from West Berlin, founded lasermaker LAS in 1992 near Potsdam to be close to his eastern suppliers. "There's a real pioneering spirit here to tap into," he says. Today, 60% of his company's $2.64 million in sales comes from exports, mostly to the U.S. and Japan, and he opened a sales unit in Santa Clara, Calif., this spring.

There remain plenty of problems to tackle. Many east Germans just cannot get off the dole or move up from one of the thousands of make-work jobs concocted by bureaucrats. Robust growth rates also paper over weaknesses. Construction is 18% of gross domestic product, compared with 5.5% in the west. Tax breaks that encourage western investment in real estate are creating a glut of office space in the major cities. And manufacturing makes up only 19% of the eastern economy, versus 28% in the west. "They can't just cut hair and deliver pizzas," frets Bernard Veltrup, head of a development team in the Economics Ministry in Bonn.

RISING FAST. The key is to develop globally competitive manufacturing. But thanks to a politically expedient agreement to bring industry wages swiftly up to western levels, unit costs are still 35% higher than in the west. Productivity is rising fast, but it remains half that of the west, and manufacturers cannot pay low wages to compensate. The Economics Ministry now wants to help funnel capital to manufacturers. One idea: to set up a fund that will offer investors a nice interest income and a tax break, then put the assets to use making long-term, low-interest loans for eastern companies.

It's easy for Germans to forget that eastern Germany is no longer the ruin it was. But six years after the fall of the Berlin wall, something remarkable is happening.

A SURPRISING GROWTH SPURT

EASTERN WESTERN

GERMANY GERMANY

GDP 9.0% 2.3%

GROWTH*

EXPORT 25.0 6.8

GROWTH*

INVESTMENT 13.7 3.9

GROWTH*

UNEMPLOYMENT 13.1 8.0

RATE

*Estimated annual change from 1994 DATA: DEUTSCHE BANKBy Karen Lowry Miller in Dresden


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