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The Worst Is Finally Over In Eastern Germany (Int'l Edition)


International -- Intl' Business: GERMANY

THE WORST IS FINALLY OVER IN EASTERN GERMANY (int'l edition)

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. Now, his 25-year-old son Christian, fresh from business school, helps run the company.

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.

That's not to say the conversion is complete. The official unemployment rate, at 14.2%, is still frightening. Transfer payments from western Germany will top $100 billion in 1995, putting a severe strain on the federal budget. 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 the buildup could last 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. New fiber-optic cable is giving the region the country's most advanced telecom system. 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. To take advantage of the Dresden area's skilled engineers and excellent universities, Siemens is spending almost $2 billion on a center for microelectronics research and production there. As it ramps up what will be the most modern chip factory in Europe, Siemens expects to employ up to 1,500 people directly and create another 3,000 local jobs for suppliers and services.

PIONEER SPIRIT. Westerners with more limited resources are also finding eastern Germany fertile territory for startups, especially high-tech ones. 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. As a result, Munich-based venture capital fund Technology Holding has invested $714,000 to help Gries expand from making lasers for scientific research to producing those for industry, such as printing.

Many business owners in eastern Germany are also starting once more to take advantage of their location. The collapse of Soviet markets threw many businesses into a tailspin, but as Central European economies recover, they are starting to revive traditional trading ties with eastern Germany. Take Gunter Schafer, president of a metal-parts maker near Dresden that this year should make a small profit on almost $11 million in sales. Schafer just got back from the Ukraine, where he spoke with potential parts suppliers. Stefan Bauer, owner of a Zwickau-based trucking company, drives through Poland drumming up business. Exports to Central Europe rose 15% in 1994 after dropping for several years.

With eastern Germany finally exhibiting renewed vitality, policymakers now have to figure out the best way of moving the local economy to the next phase. 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. "All the illusions we had are gone," says Hans-Joachim Conrad, 53, a one-time chemist in east Berlin, now stuck in the government-backed job of teaching schoolchildren about the environment.

Robust growth rates also paper over weaknesses in eastern Germany's mix of businesses. The area only accounts for 2% of all German exports. Construction is 18% of GDP, 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.

The key is to develop globally competitive manufacturing. New factories from Siemens and Volkswagen will help. 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.

EASY TO FORGET. 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 use the assets for long-term, low-interest loans for eastern companies. Policymakers may also make it easier for small companies to defer tax payments until the businesses have been paid by their customers. "It's better to subsidize risk than pay billions to old industries," says Lothar Spath, a former politician now running technology company Jenoptik.

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.By Karen Lowry Miller in Dresden


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