Unit 1: Post-war development and structure of the German economy

(Harald Bathelt, Clare Wiseman, Guido Zakrzewski)

Economic reality in Germany does not necessarily fit into popular stereotypes of German ‘Gemütlichkeit’ [1] as perceived in many countries. Germany is the most important industrial country in Europe and the world’s third most powerful country following the U.S. and Japan. The share of employees working in the manufacturing industry is higher than that in the U.S., Japan, the UK and France. Unlike in the U.S., where resource extraction has been an important basis for economic development, technological and scientific know-how and a highly developed infrastructure have formed the basis of Germany’s economic success. Germany was, of course, not always a leading industrial country.

A brief look at the country’s historical development helps to gain an understanding of how political and societal changes have strongly shaped economic development. Until about 1870, Germany was a feudalistic agricultural country characterized by intensive land-use. Albeit comparatively minor in importance, some handicraft and manufacturing did also take place. With the onset of industrialization, steady economic growth began to take hold and the manufacturing industry emerged to become the most important sector. Mining, mineral production, the textile and clothing industry, ship and railway building, the chemical industry and mechanical engineering were among the major industries. Initially, industry, handicrafts and trade concentrated in the larger cities. From these emerging agglomerations, they then spread into other areas that had good access to the transportation infrastructure and resource base. The rise and diffusion of industrial growth from these centers was associated with economic and population growth. The greatest part of Germany’s landscape, however, remained rural. Traditional industrial regions are still major agglomerations today (e.g. coastal regions with ship building like Hamburg or the Ruhr District with heavy industries). Some sectors are still situated in their original locations and continue to be economically important (e.g. the chemical industry). Others, such as heavy industries, have declined in importance since the end of World War II. This has caused structural problems in the respective affected regions.

Development until World War II was highly concentrated in agglomerations. Changes in the economic system and further growth was stimulated with the establishment of the Weimar Republic, despite its struggles to meet its compensation payments to the Allies and a period of hyperinflation which took place immediately after World War I. The Great Depression of the late 1920s shook Germany’s economy causing high unemployment and a decline in welfare. The Nazis, who took power in 1933, put an end to the beginnings of a market-oriented economy. During the Nazi regime, the economy was primarily planned and state-directed. Growth was made possible by state-financed military and infrastructure schemes and based on pressure and violence against all opposing groups. Specialization on mass military production in all sectors was the key to the economy and provided the engine for World War II.

From the early 1950s, after the western occupied territory became the Federal Republic of Germany (F.R.G.) in 1949, until the late 1960s the economy boomed due to rebuilding and reconstruction activities. This was supported by the monetary reform in 1948, the establishment of a competition-orientated system, capital and currency aid for investments and imports with the help of the Marshall-Plan. The economic boom was, however, primarily due to domestic investments, a growth in private demand, a dismantling of monopolies and the focus on exports. The eastern part of the country became the German Democratic Republic (G.D.R.). The recovery of the German economy was accompanied by a continuous growth in income and employment, as well as the establishment of a stable social network. High volume production of consumer goods was prevalent. The focus of the industry switched to cars, machines, electrical equipment, furniture and, due to steady technological progress, to new products and markets. Because of population losses from World War II, the lack of an adequate workforce was a problem until the 1960s. Attempts were then made to attract workers from southern Europe and Turkey to close the gap. At the beginning of the 1970s, the first signs of stagnation began to emerge and, together with the oil crisis of 1973, economic problems in many sectors arose. Unemployment has continued to increase since 1981. During the 1980s, development depended largely on the growth of the service sectors and technology-intensive production. This has led to unbalanced economic development both in spatial and sectoral terms.

A major shock to Germany’s overall economic situation came with the German unification [2] in 1990. This has instigated a number of major transformation and adaptive processes. The goal was to effectively transform eastern Germany into a market economy. The merging of two systems has resulted in social and economic problems. Supported by private investments, the massive efforts to restructure and rebuild cost some DM 1,000 billion in transfer payments. People in eastern Germany demanded consumer goods in large amounts to make up for their previous deprivation. This led to a temporary economic boom in western Germany. After having satiated their initial needs for western products, the people were faced to deal with the realities and difficulties of establishing a competitive economy. Many western firms opened up branches in the eastern part. These investments, however, neither made up for the economic losses through unification nor did they contribute to decisive growth. This is due to the fact that the economic base was being simultaneously eroded by the privatization of former state-owned firms. The weak economic base and the lack of domestic investments, partially due to the lack of capital, are a major problem in eastern Germany. Through restructuring measures, major parts of the workforce were laid-off. The unemployment rates have soared since and are still around 20% in the five eastern states. Some regions in eastern Germany are among the poorest in Europe.

To understand these difficulties, a quick look at history is necessary. The introduction of the state-directed economy in East Germany completely eliminated existing structures. It was dominated by an extreme dependency on the Soviet Union. Right after the occupation of eastern Germany’s territory in 1945, the Soviets began to use existing plants and other facilities without virtual reinvestment. This made the rebuilding and growth process in East Germany more difficult. The economic system with its centralized planning proved to be highly inefficient. The economy deteriorated. East Germany, which had the strongest socialist economy at that time, stagnated in the 1980s. The decline of markets in the eastern block was a major reason for this. The existence of large state-directed monopoly organizations (Kombinate), which were established by expropriations, over-employment, serious environmental damage, non-competitive industries, a lack of commerce, decaying infrastructure and housing and an overall lack of supply were the legacies of the past.

Since the early 1990s, the unified German economy has been performing weakly. This has been accompanied by a lack of domestic demand, harder competition and changing market structures, exchange rate instabilities and a stagnation in investments. Since 1993, the German economy has stagnated and production and exports have experienced a partial decline. This has caused a recession. New international competition from low-cost countries has forced most industries to rationalize their production and adopt new computerized technologies. Further, the internationalization of markets, strategies and locations, along with a growing importance and power of multinational firms, has accelerated.

Unemployment rates and numbers by Länder are a good indicator for the uneven economic development in Germany. In December 1998, Bremen, Saarland, Hamburg, Schleswig-Holstein and Berlin had the highest unemployment rates in the West. Unemployment rates in the East are among the highest in Europe. Overall, unemployment in the western Länder grew from 2.2 million in 1984 to 3 million in 1998. Germany had a total of about 4.2 million unemployed, a post-war high. Changes in the sectoral composition of the German economy have reinforced economic problems. Germany seems to be developing into a service economy, although the share of service employees is lower than that in the U.S. or Japan. Few industrially dominated core areas do, however, exist. Overall, more people work in the service sector than in the manufacturing industry, construction and agricultural sectors. Since 1984, the share of employees in trade, banks and insurance, transport and communication has constantly been rising. Employment in business and financial services, marketing, media, education and research and development, medical and technological services has particularly been on the increase. In contrast, employment in industry, construction, agriculture, mining and the energy sector has either stagnated or declined. Growing sectors, though, have not fully compensated for job losses in the manufacturing industry.

In regional terms, the German economy is still divided between broad rural, weakly structured areas and modern urban agglomerations. In western Germany, regional disparities traditionally existed between the highly industrialized northern and western parts and the rural southern region. With the help of subsidies and the establishment of industries in the south, this situation was reversed in the post-war period; that is, a South-North disparity occurred. Today, the southern part is the strongest with lower unemployment rates, higher incomes and modern structures. Hesse [3] and Bavaria [4], for instance, were once structurally weak, rural Länder. Due to infrastructure improvements, immigration after World War II and the establishment and growth of industries, they are powerful today. At the same time, formerly rich regions, such as those in North Rhine-Westphalia, lost some of their economic strength. The steel industry and ship yard crises, having led to the decline of these sectors and job losses, also caused social problems in the old heavy industrialized regions. In the coal and steel industry, subsidies and restructuring measures were able to partly stop regional deterioration, although many of the plants were forced to close down. The remnants of industrial plants, such as the Museum Völklinger Hütte [5], speak of a better time. Sectoral structural changes are therefore strongly related to regional developments. They disfavored rural areas, traditionally industrialized regions and the eastern Länder as a whole. Today, the economic disparities between the eastern and western parts are considerable.

The regional economic structure of Germany is rather variable. Economic centers are typically traditional industrial areas or large agglomerations. The latter, which include such cities as Frankfurt [6], Hamburg, Munich [7], Cologne [8] and Berlin, often serve as principal locations for services, communication, trade, transport, financial sectors and government activities. Baden-Wurttemberg, Hesse and Bavaria have important industrial centers with a large proportion of technology-intensive operations. There, electrical engineering, mechanical engineering, automobile production and the communication and chemical industry are important. In the more rural areas of Schleswig-Holstein [9] and Lower Saxony, agriculture and fishing are still important. Lower Saxony is also a principal center for automobile production and the home of several other industries. North Rhine-Westphalia has the largest number of firms, employees and inhabitants of all Länder. Its structure is diverse and encompasses high technology sectors, traditional heavy industries and service sectors. Industry is strongest here. Bremen [10] and Saarland [11] have experienced problems due to their focus on traditional industries. East Germany’s major activities are construction, light industry and agriculture. Major economic centers are the Berlin region with its services, the Halle-Leipzig area, Dresden and southern Saxony and central Thuringia [12]. Brandenburg [13] and Mecklenburg-Western Pomerania [14] are more rural structured. The public sector and construction play a vital role in the eastern Länder.

In comparing the share of industrial to the total number of employees, the regional concentration and importance of industries can be observed. In 1997, Bavaria, Baden-Wurttemberg, Rhineland-Palatinate, North Rhine-Westphalia and Lower Saxony had an overall share of more than 30% of all employees working in the manufacturing industry. For some Länder, however, the service and government sector was of greater or equal importance than manufacturing. The industrial basis of eastern Germany is weak; only Saxony and Thuringia have an industrial employment share of around 20%. In terms of the number of industrial employees by Länder, North Rhine-Westphalia had the largest labor force with 1.5 million in 1997, followed by Baden-Wurttemberg (1.2 million) and Bavaria (1.1 million). Western Germany was the home of 5.7 million industrial employees. Eastern Germany accounted for only 560,000 employees, of which Saxony had almost 200,000.

In analyzing the changes of industrial employment by Länder, it becomes clear that all western Länder have experienced a decrease. From 1984 until 1994, 16% of industrial employees lost their jobs in Saarland and Hamburg, while 11.3% became unemployed in North Rhine-Westphalia. Much better off were Bavaria, Schleswig-Holstein and Bremen, with a decrease of 1-2%. Western Germany lost 7% of all industrial employees in that period overall; 6.3 million employees were left in 1994. From 1970 to 1994, the changes were even more dramatic. The job losses were extremely high in North Rhine-Westphalia during this period (i.e. over 36% or almost 1 million people lost their jobs). Overall, 26.6% of the jobs in Germany were cut over a 24-year period (2.3 million). At the same time, a large number of firm closures in manufacturing occurred in Hamburg, North Rhine-Westphalia, Hesse and Lower Saxony. In 1994, there were 11,000 fewer firms in western Germany than in 1970.

Regional disparities in Germany are considerable. This becomes especially apparent when one compares the average annual income per industrial employee by Länder. The average annual income ranges from DM 78,000 in Hamburg to DM 42,000 in Thuringia. Low wages in eastern Germany are a product of low productivity and the consequences of German unification. Intraregional disparities (i.e. between rural areas and agglomerations) are not included in these numbers. Here, differences are even greater and are as much as 30%. High incomes in the southern Länder Hesse, Baden-Wurttemberg an Bavaria are associated with their sectoral structure and high productivity. In contrast, Saarland and Schleswig-Holstein are monostructured, old-industrial regions. Economic activity is lacking in eastern Germany.

A good indicator of industrial productivity is the labor productivity index (i.e. sales per employee in industrial sectors). Depending on the sectoral structure in the Länder, the index can display regional differences. If there is a high share of productive firm clusters, regional productivity and income are greater. The productivity numbers show a substantial difference between the eastern and western regions. In western Germany, average sales per employee were DM 356,000. This was a mere DM 253,000 in eastern Germany. Only the mining and minerals industry is more productive in the eastern parts. All other sectors are clearly more productive in the West. Sectoral productivity differences within western Germany range from the mining and minerals industry (DM 167,700) to automobiles/ vehicles (DM 428,500), chemicals (DM 472,000) and the food/ tobacco industry (DM 515,000). The same pattern exists among the eastern industries on a lower productivity level.

In terms of industrial employment by sector, mechanical engineering was the largest sector in Germany in 1997 with some 900,000 employees. This was followed by the automobile/ vehicle and the metal processing industries (each with about 790,000 employees). Still significant are mining/ minerals, leather, wood, oil processing, textile/ clothing and glass/ ceramics/ mineral processing. The industrial structure in the eastern regions has basically remained the same, with the exception of the food/ tobacco industry which has grown in importance. The number of firms is, however, extremely small compared to the western Länder. The greatest number of firms in western Germany are in the metal processing industry, followed by mechanical engineering, electrical engineering and food/ tobacco. Altogether, 39,300 firms with 20 or more employees were based in western Germany. In eastern Germany, 6,750 firms were present, the majority operating in glass/ ceramics/ mineral processing, mechanical engineering and food/ tobacco.

[1] http://deil.lang.uiuc.edu/class.pages/daad95/stereotypes.html#country
[2] http://www.duke.edu/~hhayes/reunification.html
[3] http://www.hessen.de/wirtschaft/html/english.htm
[4] http://www.bayern.de/Bayern/Information/wirtschaftE.html
[5] http://server02.is.uni-sb.de/huette/de/voelkl//
[6] http://www.frankfurt.de/index-e-content.html
[7] http://www.munich-info.de/portrait/welcome_en.html
[8] http://www.koeln.de/portrait/e/economy.html
[9] http://www.schleswig-holstein.de/index/1,2709,JGdlbz0yNCRvaz0xMjMwOCR1az0k,00.html
[10] http://www.bremen.de/info/bremen/homee.html
[11] http://www.statistik.saarland.de
[12] http://www.thueringen.de
[13] http://www.brandenburg.de/n_land.htm
[14] http://www.mecklenburg-vorpommern.de/content.html

Bibliography