NCPA - National Center for Policy Analysis

Oases Of Entrepreneurship In East German Desert

November 12, 1999

Even 10 years after the fall of the Berlin Wall, East Germany largely remains a study in shuttered factories and stagnant growth.

But in Saxony -- East Germany's most populous state -- industrial production is climbing at double-digit rates, twice as high as in the west. Thousands of new ventures -- many of them high-technology start-ups -- are helping bring down the former communist sector's high unemployment rate.

Nevertheless, the East still has a long way to go.

  • One turn-off to foreign investment is high wage rates -- which for factory workers are often higher than those in the U.S..
  • Partly as a result of efforts to equalize pay in the East and the West, hundreds of thousands of low-skilled jobs which might have been ideal for eastern Germany have been lost to lower-cost rivals in the Czech Republic, Poland and elsewhere in Central Europe.
  • Over the last decade, many east Germans have seethed quietly as west Germans took over companies in the east -- only to sell their real estate and shut factories down.
  • East Germans are having a difficult time finding their identity -- as evidenced in a recent survey that showed that while only 9 percent wanted to return to the old regime, a solid majority could not identify with West Germany either.

Though the German government has pruned back subsidies, western taxpayers still pay a hefty "solidarity surcharge" to help finance eastern reconstruction, pensions and unemployment costs. There are no signs the charges will be eliminated anytime soon.

Taking into account the benefits the new start-up companies are providing and the lingering problems of transition, observers say East Germany will require another 10 or 15 years before it can wean itself from money from the west.

Source: Edmund L. Andrews, "On Sterile East German Soil, Some New Companies Thrive," New York Times, November 12, 1999.


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