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The German Reunification: Identifying the Role Players of Development

 

In West Germany, the post-war economic "miracle" was of major significance towards reestablishing a combination of national confidence and pride in a post-Nazi period. However, the 1990s saw major pressure being exerted on Modell Deutschland - a pressure which originated from the difficulty reuniting the politically disjointed nations and the changes in how the global economy was working. This also came by as a result of Germany's efforts and desire to play a constructive role in the United Nations (UN) and the North Atlantic Treaty Organisation (NATO), and also through the implications of European political, economic and monetary union.

The system that the Germans adopted after 1945 in the west brought them stability and prosperity, as well as envy from their neighbours. They have applied devolution of power that is a reaction against Nazi dictatorship, a social-market economy and, not the least, a hard deutsche mark (DM). All that contributed towards a sense of post-war pride and identity for the German people. Yet, the successes of "Modell Deutschland" are usually overestimated due to the conditions that have led to sustained economic growth, monetary stability and industrial harmony. However, this does not imply that the German model can be readily transferable to other countries.

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Post-war capitalism has offered three main models of economic thought and practice associated with superior economic performance: (1) the United States model, with an increased reference to an Anglo-American model of "enterprise culture," deregulation and privatisation; (2) the Asian-Pacific models, which is, in effect, the Japanese model, with work-centred cultures and ethos of group values and discipline; and (3) the German model. The German model provided an outstanding economic performance that was consistent with a deep-rooted cultural attachment to values of stability and order. Economic growth, external balance, price stability and employment were its main features. Its excellent performance went along with traditional German values and the values that have been reinforced by the German dreadful experiences of the 1920s and 1930s. Germany's "economic miracle" was proven through the average annual increase of real gross domestic product (GDP) of 8.2 percent between 1950 and 1960, and 4.4 per between 1960 and 1973. Between 1949 and 1990, the economy suffered a current account deficit in only seven years.

Along with "sound" money and the independent role of the Bundesbank, the integral characteristics of the German model included a long-term approach to managing corporate government, the existence of order and consensus in industrial change, and the notion of a limited state that frames general rules but refrains from intervention.

More quickly than anyone could have imagined, the two Germanys reunited on October 3, 1990. As the New York Times noted: "Forty-five years after it was carved up in defeat and disgrace, Germany was reunited today in a midnight celebration of pealing bells, national hymns and the jubilant blare of good old Germany oom-pah-pah."

However miraculous, the reunification of Germany in 1990 was not a fairy tale ending with the famous phrase, "…and they lived happily ever after." Unity came with an enormous price tag that was taxing the generosity of West Germany. Unification has generated high level social costs and involved large-scale disruptions.

While the West Germans had grown politically and economically secure in the Federal Republic, their East German cousins appeared ever more distant and removed. East Germany, once rated as the world's 12th mightiest industrial economy, revealed itself to be powerless and inefficient with the fall of the Berlin Wall. Eastern Germany's plants, or, more appropriately, its shattered industrial museums, have become the property and the curse of the united country. Unification may have brought economic freedom in the East, but it was no "free lunch" with the financial costs imposed to the West Germans. In 1991, the first year after the reunification, the federal government, along with the western state governments gave the East 140 billion DM. This was done in order to pay for the social security checks of the retired, the jobless benefits of the previously employed, and the health care of people regardless of employment status. Funding transfers to the East would consume roughly one-quarter of public spending to Germany. Without higher taxes or lower spending in the West, such generosity was bound to swell the deficit and to pile up a huge mountain of debt in the future.

While the West Germans had grown politically and economically secure in the Federal Republic, their East German cousins appeared ever more distant and removed. East Germany, once rated as the world's 12th mightiest industrial economy, revealed itself to be powerless and inefficient with the fall of the Berlin Wall. Eastern Germany's plants, or, more appropriately, its shattered industrial museums, have become the property and the curse of the united country. Unification may have brought economic freedom in the East, but it was no "free lunch" with the financial costs imposed to the West Germans. In 1991, the first year after the reunification, the federal government, along with the western state governments gave the East 140 billion DM. This was done in order to pay for the social security checks of the retired, the jobless benefits of the previously employed, and the health care of people regardless of employment status. Funding transfers to the East would consume roughly one-quarter of public spending to Germany. Without higher taxes or lower spending in the West, such generosity was bound to swell the deficit and to pile up a huge mountain of debt in the future.

A further challenge to the German model is globalisation. The organisation and distribution of production on a transactional basis has posed a threat to Germany, with its mixture of insider corporate governance and regulatory culture in these sectors. Germany has defensively confronted, rather than actively shared in and shaped globalisation. In addition, the alteration from mass production to flexible specialisation in production and production processes, also termed post-Fordism - as a consequence of accelerating technological progress - has raised grave questions about the continuing effectiveness and viability of the German model. Both developments of globalisation and post-Fordism has placed a premium on the speed of decision, reduction costs, flexibility of employment and working practices, more innovative methods of raising capital for new ventures and more internationally experienced managers. The task of employing such measures in Germany is extremely difficult due to the federalist structures and neo-corporatist practices at the sectoral level, which provide enormous latitude to vested interests to block reform.

The European Union (EU) has offered Germany various opportunities, but the country has been faced with great difficulties in transposing the EU single market directives into national law. The German government has found itself caught between EU pressures and powerful domestic vested interests.

The emerging problems in the German model were harshly exposed by corporate crises: in 1994, at Mannesman and Schneider property group, and in 1995-96, at Daimler-Benz. The underlying weakness, evident in both crises, was that of internal control within the system of corporate governance. In contrast, attention was focused on the Anglo-American model, with the mechanism of takeovers as a response to company efficiency. In addition, the tradition of solidarity in collective bargaining was brought into question. Germany, like other industrialised countries, needs new ways to nurture its economy, in ways that stress cooperation over competition. "Markets cannot be reached purely by export activities," said Edzard Reuter, chairman of Daimler-Benz and acknowledged dean of German industrial leaders. "If you want to stay competitive, you have to invest in other countries. You have to go where the markets are." That suggests a different approach in doing business. "In the past, the practice was to buy other companies or shares of other companies. This is now being replaced by coöperation, with the so-called strategic alliances. These alliances are becoming more and more international, creating companies with shareholders in Japan, America, and Europe, companies with international executives speaking international languages."

Reunification exacerbated - but did not create - the institutional and fiscal problems inherent in contemporary German welfare. Yet, German social policy has now entered a new phase, with the return to a search for a resolution of chronic concerns that are centred on the modernisation of the system. Prior to the union, the Federal Republic of Germany (FRG) and the German Democratic Republic (GDR) maintained distinct welfare systems. The western model was a combination of pluralism, corporatism and decentralisation, while the eastern model was built on centralised and universalist elements, with greater emphasis on equity of treatment, and marked not so much by a lack of coverage but deficiencies of quality. Following reunification, it was the western model that prevailed. Although organisational uniformity was imposed in terms of social entitlements, dual welfare remained divided. In general, reunification boosted income inequality in the East due to high levels of unemployment, although these inequalities are not as acute as in the West. The comparatively good performance of the German system for the majority consolidates the "insider" welfare constituency whose representatives, aided by welfare suppliers, mobilised to preserve as many as possible of their entitlements within the plural system. These interests reinforce corporate notions of solidarity, but they now coexist with ad hoc and incremented socialised solidarity. The federal government has assumed liability for the increasing numbers of "outsiders" through pensioner "social supplements," funded social assistance for refugees and asylum seekers, raised "social solidarity" taxation supplements, and has afforded itself a more central role in subsidising the inter-Lander financial equalisation scheme. To a certain degree, governmental policy has been influenced by the sensibilities of its social policy advocates, evident in the high profile given to job-creation measures and the socialising of welfare costs, which has also been exploited as an opportunity for higher regulation and stricter policing.

Since taking office 15 years ago, Chancellor Helmut Kohl's centre-right coalition has made two errors. It failed to push hard enough for a leaner, fitter economy in the 1980s, with lesser state intervention and more private initiative that was needed to keep Germany competitive. Secondly, in the early 1990s, it badly underestimated the cost of putting the former communist East on its feet. Since the last election, in 1994, the government has faced considerable social and economic reforms against a background of public borrowing constantly soaring above forecasts. It has made several stabs at revamping health insurance, tinkered with the pensions system and has just seen the cornerstone of its tax-reform plan crumble in Parliament. Rising costs, especially for the more than four million jobless, and the need to cut debt to qualify for the single European currency on time in 1999, caused the government to launch an abortive bid to get its hands on the book profit from revalued Bundesbank gold.

The balance of power within the federal system, the autonomy of public service and educational bodies, the policy-making role of professional bodies - all these had been problems in the old FRG. The addition of the five new Lander, with greatly different experiences, needs and resources, have put more problems on the inherited structures. Above all, it has put a new strain on the office of the Chancellor. Even before 1990, the old model of "chancellor democracy," as it has come to be understood in the early years of the FRG, had become inadequate. Public opinion had become more diverse and less adaptable: organised interests had become more entrenched and confident in their power. The Bundesrat, for its part, had gradually extended its competence over nearly half the total federal legislation. That implied that the Chancellor's role had to be that of a negotiator and conciliator, and less of a policy initiator. In addition, the gradual emergence of the FRG as a major international actor means that the Chancellor's responsibilities has expanded, without being matched by an equal expansion of powers.

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