Economic Transformation in Eastern Europe

and East Asia

Springer Berlin

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Herbert Hax • Wolfgang Klenner Willi Kraus • Tomoo Matsuda

Takafusa Nakamura (Eds.)

Economic Transformation

in Eastern Europe and East Asia

A Challenge for Japan and Germany

With 3 Figures

.~. T Springer

Prof. Dr. Herbert Hax, Universitlit zu Koln, Lehrstuhl fiir allgemeine Betriebswirtschaftslehre und betriebswirtschaftliche Finanzierungslehre,

Albertus-Magnus-Platz, D-50931 Koln, FRG

Prof. Dr. Wolfgang Klenner, Ruhr-Universitlit Bochum, Fakultlit fiir Ostasienwissenschaften, Sektion Wirtschaft Ostasiens

Postfach 102148, D-44780 Bochum, FRG

em. Prof. Dr. Willi Kraus, Ruhr-Universitlit Bochum, Fakultiit fUr Ostasienwissenschaften, Sektion Wirtschaft Ostasiens

Postfach 102148, D-44780 Bochum, FRG

Prof. Dr. Tomoo Matsuda, Tokyo University, 1-9-31 Takaido-Nishi, Suginami-ku, Tokyo 168, Japan

Prof. Dr. Takafusa Nakamura, Tokyo University, 2-9-34 Kamiosaki, Shinagawa-ku, Tokyo 108, Japan

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Economic transformation in Eastern Europe and East Asia: a challenge for Japan and Germany; with 2 tables / Herbert Hax ... (ed.). - Berlin; Heidelberg; New York; Barcelona; Budapest; Hong Kong; London; Milan; Paris; Santa Clara; Singapore; Tokyo: Springer, 1995

NE: Hax, Herbert [Hrsg.]

ISBN-13: 978-3-642-85231-2 001: 10.1007/978-3-642-85229-9

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Foreword

The economic transfonnation taking place in Eastern Europe and Asia is in particular a challenge for Japan and Gennany, because these two states as the immediate neighbors of the developing regions are directly affected and also because they are the strongest economic powers in their regions and have the necessary potential to influence developments there.

Japan and Gennany are affected in many ways, both positively and negatively. Should the economic and social transformation run into difficulties, leading to economic and political chaos, perhaps even to armed conflicts, then economy and social fabric of the prosperous neighbors would doubtlessly suffer. In the past, Japan and the South-East Asian region have already experienced how economic problems in China caused millions of Chinese to seek their fortunes in other countries. An economic and political destabilization of China would today probably have even greater effects on migration flows. Similar effects can be expected in Europe, if the transfonnation process in Eastern Europe should fail.

But even less dramatic developments in Eastern Europe and East Asia can have deleterious consequences for Gennany and Japan. Both nations are linked closely to the transfonning economies near them, though at a fairly low level. A reduction in trade with them, a refusal to service debts and other economic frictions ensuing out of economic and political troubles would of necessity hamper the prosperity of Japan and Gennany.

A successful transfonnation process would without doubt benefit all economic partners to a considerable extent.

This statement, of course, is only valid in a global economic sense. Individual companies, corporate groups, branches and sectors would then meet with stiff competition, which they cannot face on an equal footing without appropriate adjustments and massive internal innovative efforts. This means that the German and Japanese governments as well as the European Commission are going to have to resist heavy pressure from the potential losers to restrict access for competitors from Eastern Europe and Asia. Among other things, it may be high time to reverse industrial policy in those branches which were only able to survive by means of high subsidies. In Japan, the resulting pressure to adjust ought to be somewhat lower than in Europe, since emphasis has lain longer on modern technology and exporting II old II industries within the context of the flying geese concept.

VI

In view of the many problems remaining unsettled in Eastern Europe and Asia, and the ensuing spectrum of varying development possibilities for this region, Japan and Germany must face the question as to how they are to operate so that the development in Eastern Europe and Asia progresses to everyone's advantage. Thus, the demand arises for their domestic economic policy to adhere more strongly to market economy ideals, reducing market insulation and deregulate and liberalize markets. In this way, the new members of the world market economy would be enabled to earn on their own the foreign currency necessary to modernize and build up their economies. At the same time, a strict adherence by western nations to market economy ideals would also be an important signal for Eastern European and Asiatic nations themselves to maintain the market economy principles.

There are also supportive measures necessary. A lot depends on the economic strength of Japan and Germany, which are at present troubled by the current weakness of the American dollar and by the costs of reunification. The capital accumulation needed to finance the transformation process in Eastern Europe and Asia can be raised through capital tranfers, also through support measures in building up a modem banking system and other mechanisms for an efficient capital employment. With regard to the second important economic production factor, labor, a broad spectrum of supporting measures is apparent. Thus, the training of managers, economists, etc. familiar with market mechanisms raises the qualification of man power. In this way, modem organization forms and management methods can be more swiftly realized. By developing a functioning labor market the allocation of labor can be more flexibly and thus more efficiently organized.

A successful regulatory restructuring will in any case increase linkages between Germany and Japan with regions, which have been cut off behind political, ideological and military barriers from "normal" economic linkages. It will be interesting to see whether integration is realized in a manner that conforms to theoretical models deriving from the operations of market mechanisms and has been observed up to now in the "open" regions of international economy.

A discussion of these problems was the goal of the Tenth German-Japanese Seminar on Economics and Social Sciences, held at the Ruhr-Universitiit Bochum from September 27 to 29, 1993 on "Economic Transformation in Eastern Europe and East Asia - A Challenge for Japan and Germany." The publication of the papers read at this conference is an excellent opportunity to express thanks to all who contributed to the realization of this German-Japanese exchange of knowled­ge and ideas. Especial thanks are due the Forderverein Japanisch-Deutscher Kulturbeziehungen e. V., Cologne for its financial assistance in publishing these papers.

Wolfgang Klenner

Table of Contents

1. A Critical View of Japan as an Economic Power ................................. l Takafusa Nakamura

2. Germany's Economic Strength and Integration Willingness ..................... 7 Wim Kosters

3. Key Factors for Japan's High Rate of Economic Growth ..................... 23 Tokue Shibata

4. The Shift from a Net Capital Exporter to a Net Capital Importer - The Case of Germany - ........................................................ 35

Christian Watrin and Malte KrUger

5. The Japanese Labor Market Today ................................................ 45 Kazuaki Tezuka

6. Germany's Contribution to the Development of Labor Markets in Eastern Europe ............................................... 53 Artur Woll

7. Remarks COQcerning the Transfer of Managerial and Organi7.ational Methods to Ea..'!tem Europe: Opportunities and Problems for Japan ......... 65 Haruo Oba

8. Transferring Managerial and Organizational Methods to Eastern Europe .......................................................... 79 Georg Schreyogg

9. German Unification and the Effects on Central and Eastern Europe ........ 91 Hisashi Watanabe

10. The Economic Effects of German Reunification on West and East Europe .......................................................... 113

Willy Kraus

11. Effecl'! of Growing Economic Integration in Ea..'!t Asia on Japan's Economy ................................................ 131 Wolfgang Klenner

A Critical View of Japan as an Economic Power

Takafusa Nakamura!

It is common knowledge that the Japanese economy has been a target of criticism from the United States and the European Community due to its perfonnance over the last twenty years. This blames Japan for everything from huge surpluses in current accounts, floods of Japanese cars and electronics sweeping over the Amer­ican and European markets, down to administrative restrictions on the access of foreign enterprise to the Japanese home market. The clearest response to these accusations came in the "Maekawa Report," drafted by a committee chaired by the late H. Maekawa, former Governor of the Bank of Japan, at the request of the then Premier Yasuhiro Nakasone. This report may be summarized in the follo­wing points: The huge surpluses in current balances result from an industrial structure which stresses export promotion. Japan should make every effort not only to cooperate in the international economy, but also to stimulate domestic de­mand for economic growth, especially by expanding personal consumption and by improving the quality of domestic life. Concrete measures to attain these goals consist of the relaxation of government regulations on economic activities, the ab­rogation of a tax reducing system to encourage domestic savings, the reduction of income taxes to promote domestic consumption, the curtailment of working hours to increase leisure time and the liberalization of the agricultural market to increase imports. The Maekawa Report was warmly received by the United States and the European Community.

The Japanese balance of payments, however, did not lower the surplus. In September 1985, the G5 meeting agreed to a 15-20% depreciation of the U.s. dollar against the Deutsche Mark and Japanese yen in order to ease the U.S. defi­citary balance of trade (Plaza Accord). In spite of the yen appreciation, the Japanese surplus continued to grow, as did the U.S. deficit. The differences of balance, it seems to me, are partly due to the "J-curve effect", but mainly to differences in competitive strengths. The figure on the next page shows the Japanese trade balance since 1970. Japanese exports expanded straight through the periods of yen revaluation, so the surplus of trade balance still increased.

!Professor of Economics, Ochanomizu University, Tokyo.

2

Though consultations to improve the Japanese trade imbalance with the Unit­ed States and the European Community were repeatedly held, the situation did not change markedly. The U.S. government recently required the setting of quantitati­ve targets so that some share of Japan's domestic demand for memory chips could be covered by imports from the U.S. It is necessary to analyse the composition of the Japanese economy in order to explain the mechanism which generates such foreign trade surplUses.

Japan's Exports and Imports (hundred billion Y; billion $)

-10 L-_-'--__ -'-_____________________

1970 1975 1980 1985 1990 1993

loM$-lmports I-i$-Exports +¥-Imports .¥-Exportsl

Source: Ministry of Finance, Foreign Trade Statistics.

1 Structural Factors of the Trade Balance

Japanese industries such as the automotive, optical and electronics manufacturers developed a long-term investment strategy which focussed on the export market.

3

Major companies developed their products-cars, television, cameras, entertain­ment electronics, etc.-with an eye toward export markets and built up branch networks in the United States and Europe for sales promotion. In the existing climate of a rapid yen revaluation, they were all making efforts toward cutting production costs by putting pressure on subcontractors to lower component prices, or by shifting production to subcontractors in South-East Asia and by simplifying product designs. Thus, the Japanese export price index (in yen) declined more than 20% between 1985 and 1988, and increased only 15% in dollar values. The negative effects of yen revaluation were thus countered by these efforts.

On the other side of the balance sheet yen revaluation promoted the expan­sion of imports. This was most impressive in the field of finished products, which share rose from 25% in 1985 to 50% in 1988 of all imports. The Japanese economy boomed between 1987 and 1990, with imports increasing so sharply than the overall surplus of trade declined. After 1991 the swing-down resulted in a recession and, imports stagnated, so that the balance of trade surplus surged again.

Summarizing this process, the Japanese economy is structured to maintain highly competitive strengths especially for major exports-mechanical and electronic goods. Since these industries cannot grow without the export market, it may be stated conversely that exports acted to stabilize the economy over the last twenty years. In looking for new trends, it may be noteworthy that the markets for these major industries---cars, electronics, optics-are going to be saturated very shortly. On a more general level, as Prof. Kaname Akamatsu pointed out, every industry goes through take off, growth and saturation stages in its development. It seems to me that the major Japanese industries have now completed the growth stage and are moving into the saturation stage. For the Japanese economy it will be a period of transformation for major finns from mechanical and electronics industries to, perhaps, service industries.

2 Internationalization and Bubble Economy

In the 1980s the Japanese economy deregulated in the important field of interna­tional monetary transactions, complying with the demands of the U.S. govern­ment. Japanese financial institutions (banks) and industrial corporations engaged in monetary transactions and setting up daughter corporations at the international level. In the field of finance, Japan's private sector foreign assets and liabilities grew as follows (billion $):

Year Assets Liabilities

1980 113 129

1985 373 269

1988 1267 1119

1991 1776 1490

Japan's enterprises issued huge volumes of convertible bonds and bonds with

4

warrants attached on domestic and foreign markets in the latter 1980s. In 1989, fund raising on domestic markets surpassed 17 trillion yen (135 billion dollars) and on foreign markets 11 trillion yen (87 billion dollars).

These facts make two things significant. Firstly, the business portfolio selec­tion expanded. Finns were able to choose more advantageous ways raising funds not only on the domestic but also on the international market. With the yen rising, Japanese bonds were highly welcome on the Euro-money market, so that the conditions for issuing Japanese bonds were profitable. International money markets were opened to Japanese finns at very low rates.

How were these funds raised then invested? The Japanese economy passed through a brief recession in 1986 due to the higher yen exchange rate, affecting mainly the export industries-automobiles, electronics, optics and other, minor local industries. In 1987, however, the economic situation picked up rapidly due to the reduction in price of imported goods, rationalization successes in export in­dustries and a low interest policy. Prices of stocks and real estate rose under an easy money situation. Firms engaged in speculation on stocks and urban real estate. In fact, the average stock price sky-rocketed according to the Nikkei Newspaper from Y12,566 in 1985 to 134,059 in 1989. The real estate price index in six large cities jumped from 33.6 in March 1985 to 100 in March 1990. Large portions of the funds available to industry were diverted into speculation on stocks and real estate. In the boom period speculations garnered huge profits; however, with the adoption of a tight money policy at the end of 1989, the prices of stocks and real estate went into a decline. During the boom firms and indivi­duals had swarmed over the speculative markets. Although some of them made huge profits, others were severely mauled. A number of enterprises (including financial institutions) are still embarassed at holding depreciated assets. The bursting of the bubble left behind some considerable debris. Clearing this up took three or foUr years. Thus, the early 19908 was a period of repairs and consolida­tion.

The second significant event was the expansion of direct foreign investment. The number of subsidiary companies abroad grew from 4,462 in 1985 to 7,108 in 1993. In 1992 the distribution by continent was 2,064 in North America, 505 in Latin America, 2,597 in Asia (of which 1,693 were in Asian NIBs) and 1,461 irt Europe. The ratios of production abroad were 4.3 % in 1985 in the manufactu­ring industry, rising to over 6% in the 19908. Transportation equipment rose from 6.4% to 17.5% in 1993, while electrical machinery hovered at about 11 %.

It may be concluded that during this period of continual yen appreciation and a policy of low interest rates, Japanese finns were very active in international financial transactions and foreign investments. It was general policy not only to cover the losses resulting from the rising yen but also to take every opportunity at achieving high profitability. On the other hand, enterprises speculated on the stock and real estate markets, successfully, at first, but after 1989/90 the failures became quite conspicuous. The big banks had to write off loans impossible to recover-the majority of them had been used to fund speculations.

5

3 The Japanese Role in the World

In the 1990s, the Japanese financial world was occupied with picking up the pieces left by the burst bubble. The rate of profits to turnover and fixed in­vestment declined. The industrial production index, which had hit a peak in May 1991, was in decline until the end of 1993. In 1994, all indicators pointed again towards an upward trend. But the recession had lasted so long that the business world has become highly critical. And in fact, of the two industrial branches leading development over the last two decades since the first oil crisis, automobi­les and electronics, the former especially is stagnating in production and export. It is obvious that growth rates in the electronics industry are going to decline soon. It seems to me that the recent recession was a turning point for the Japanese economy. In the place of the old leaders, new industries are going to have to assume the role of economic locomotives. Moreover, innovations are going to be needed to search out the new frontiers of economic activity.

One of these new frontiers will be a greater degree of internationalization of economic activities. Up to now, Japanese economic growth has been based on the mass production industries such as steel, shipbuilding, petrochemicals, automobi­les and electronics. In the past twenty years, however, many new industries developed mainly in the service sector. In the near future, these industries ought to expand, not only in size but also through the opening up of new fields. Manufacturing industries must progress to new areas of business and transfer pro­duction abroad in view of the revaluing yen. Though there are fears that domestic industries may decline with the transference of production abroad, this is considered an inevitable consequence of internationalization.

,'"' " t;,;T ,,', ',"-,'

tOtal~'f~. ';~ . "'..,, ; ~. :rr,Qijl~.w' ,~ Net A$$et:J.

Japan 2,035 1,522 513

USA 2,113 2,725 -612

UK 1,802 ] ,76] 41

Germany 1,177 887 290

France 958 1,033 -75

Italy 398 516 -118

Canada 231 468 -237

Source: Bank of Japan, Comparative Economic and Financial Statistics 1994

6

Despite this, Japan's net financial assets have remained the highest in the world. At the end of 1992, total assets and liabilities of major countries were as listed in the table on the previous page (billion $). The Japanese role in the international economy is essential to supporting the world financial circulation. The USA, with the highest net liabilities in the world, is still the sole superpow­er. Japan has no choice but to support this "giant" by investing in the USA.

4 Perspectives

To illustrate Japan's present position in the world economy it is useful to consider the historical development of the early 20th Century. At that time, Great Britain was the leading political and economic power, her surplus in the trade balance amounting to nearly 10% of the GNP. Starting in the 1920s, this leadership shifted to.the United States, especially through the Second World War. The U.S. dollar became the key currency in the world and at the time of the creation of the International Monetary Fund (IMF) the U. S. was the chief giver of foreign aid. European and Asian nations seeking to overcome the ravages of the war took advantage of American assistence. America's position as world leader was not challenged in the 1950s, but after that started to decline relatively, in part due to . the rapid recovery and development of Europe and Japan, and in part due to a deterioration of American industrial productivity. The U.S. balance of payment became deficitary in the early 1970s. In contrast, Germany and Japan succeeded in raising their productivity and in gaining an important export market. As an additional difference between Germany and Japan on the one hand and Great Britain and the United States on the other, the former were content to stay economic powers and forwent political or even military leadership. At the end of the 1980s the U.S. lost its position of superpower in the field of machine exports. While the U.S. is still a major commodity exporter, most of these products are raw materials or agricultural goods; fairly low-priced. Even if Japan submits to American demands to curtail its exports, it will not conspicuously lessen Japan's surplus in the U.S.-Japanese balance of trade.

This imbalance of trade cannot be artificially corrected because it stems from structural differences in both countries. Quantitative goals will not have the desired effect in curtailing a trade balance surplus. Transforming industrial structures on the other hand, will take years.

Germany's Economic Strength and Integration Willingness

Wim KOsters'

1 Introduction

Throughout the world Japan and Germany are considered to have very successful national economies as a result of their rapid reconstruction after the war and their further economic development in the following period.2 This impression doesn't seem to have changed much in view of present economic problems, though the number of critical observers has increased lately. Compared to other industrial countries, our national economies have performed better in the past with respect to the goals of economic growth (quantitative and qualitative), price level stability, employment level and balance of foreign trade on a long-term average. On the assumption that these goals are important indicators of welfare, we may conclude that this increased more steeply in both countries in the post-war era than in most other industrial nations. The high level of welfare which arose, as well as the relatively rapid and constant development leading to it, is often considered a sign of Japan's and Germany's great economic strength for the future. From this is derived a special responsibility for the development of world economic relations, especially for the role of an economie dominante which has devolved onto om countries in their regions for the economic development of the east Asian and east European states. 3

This picture of the Japanese and German economies in the world certainly ought ~o be dra~n much more precisely in order to just approximate reality. However, in this or in a similarly simple dress it often leads to-at least this is

'Professor of Economics, Rube-University 80cbum

2.fbis was, I think, achieved in very different ways. It would certainly be interesting to do a comparative investigation on the economic development in Germany and Japan in the post-war era especially with respect to their-seen in the international context-institutional peculiarities, in order to discover thus the reasons for their relative success in the past.

3ef. D. Lorenz, "Europe and East Asia in the Context of Regionalization: Theory and Economic Policy," JOU17III/ of Asian Economics, Vol. 4, No.2, 1993, pp. 255-270.

8

true for Germany, as to Japan I cannot tell and thus limit the following argumen­tation to Germany-fairly complacent conclusions to discussions in the political field. With references to the high level of welfare already achieved and past economic development it is assumed that our own economic system-in Germany the social market economy-has obviously proved its worth and continues to function in its present form, so that substantial alterations are not necessary. Even in view of the dramatic changes in the world economy one could procede as usual, i.e. adhere to the status quo or along lines already laid down. Therefore, reactions to developments in the world economy and especially in central and eastern Europe are limited to transfer payments and subsidized credit, but hardly with a real opening up of the domestic markets. Attempts to solve development problems should procede along the lines of the slogan propagated by some politicians for the German reunification process, "overcoming the division by sharing. "

This seems to be--though never publicly admitted-the easier way for many, since it is believed that only the others have to adjust to circumstances, while the accustomed structures in one's own surroundings are generally unaffected. To achieve this one is even prepared to give up some acquired wealth or at least to forgo some of the excess being acquired as in the past, as long as this does not exceed a certain level. This policy is in effect the attempt, nationally as well as internationally, to solve poverty and development problems by redistribution or, if you will, a system of charity.

Now, ever since Adam Smith economists have known that this is not the way to effect any basic improvements.4 On the contrary, this is only possible when a dynamic, forward-looking approach replaces a static and backward-looking one. This takes place when one relys nationally and internationally on competition, that is, on open and working markets as instruments to effect general, efficient and long-term solutions. Even in view of the newer arguments for a strategic (protectionistic) trade policy, I feel that free trade can be convincingly justified as being the' optimal economic rule in international politics. S The efforts of all nations must be directed toward becoming or remaining internationally competiti­ve without any protectionist measures and thus enjoying the advantages of an international division of labor. This can only succeed if at the same time the national markets are kept functional. However, a central prerequisite is a good national economic policy, which in particular establishes the necessary framework conditions, i.e. competitive, monetary and social order.

The consequence for our topic procedes from the starting point that economic

40f course, in view of the dimensions of the problem even the mass of wealth is insufficient. In addition, the effects of such transfers are highly doubtful.

SCf. P. R. Krugman, "The Narrow and Broad Arguments for Free Trade," American Economic Review, Papers and Proceedings, Vol. 83 (1993): pp. 362-366; W. Kosters, "Freihandel versus Industriepolitik," Winschaftsdienst, 72. Ig., NT. I, 1992, pp. 40-56.

9

strength and integration willingness are mutually dependent. The economic strength (welfare) of a nation can only be preserved and increased when upon the appearence of new challenges the markets are kept open, adjustments are permitted and suported by economic policy and all this is seen as a chance to reap additional benefits from the international division of labor, which presupposes integration willingness. On the other hand, if new developments are met by protectionistic walls and measures to preserve existing structures, then national prosperity will rapidly suffer.

Germany's economic strength and integration willingness have been challenged in many areas by the process of reunification, by the transformation process in the countries of Central and Eastern Europe as well as by changes in the world economy. I should now like to make some remarks on these points.

2 On the Reunification Process: the Problem of Integrating the Two Parts of Germany

The introduction of the German-German economic, monetary and social union in mid-1990 meant for the then still existent GDR-and for the five new states, Brandenburg, Mecklenburg-West Pommerania, Saxony, Saxony-Anhalt and Thuringia, which succeeded it-more or less the complete adoption of the West German economic and social system (total integration, creation of a unitary economic region). This system is, due to its complex system of regulations, high social standards, etc., very expensive in international comparison, so that international competitiveness of business in the new states-even when wages have not been adjusted to full western levels-can only be achieved by providing for a correspondingly high level of productivity by renewing obsolete production means, creating western standards in infrastructure, management, worker trai­ning, public administration and legal system. But all these factors cannot be sufficiently altered in a short time, so despite the gigantic public transfers and a migration of manpower from eastern Germany, a high rate of unemployment has resulted. Therein we can see that the dimension of the adjustment need was at first underestimated by many and, in part, still is. The idea that the status quo in the West could be maintained, that one could procede as usual while the social market economy in its present form could be bestowed on the East, temporarily supplemented by some transfers, and thus a rapid equalization of living standards in Germany achieved, has proven to be wrong. The obstinate clinging to the introduction at the present time of a nursing insurance, whose fees would be coupled to wages, reveals that many in the political class-especially in the government as well-have still not comprehended the dimension of the challenge ensuing from reunification. Prior to or simultaneous to the transposition of the economic system of the old Federal Republic onto the five new states a reform and deregulation should have been carried out. "Lean government" should have first been introduced and tried out in the new states and then could have been

10

later extended to the old federal states. But up till now nothing effective has been done on this. The austerity package of July 1993, while no one knows how much of it will survive the parliamentary and extra-parliamentary deliberations, could be a harbinger of new thinking. It has to be realized that the necessity for adjust­ments exists not only in the new states but in the West and thus in the entire German economy as well. For if the productivity of the old federal states is not maintained, then we will soon be unable to finance the transfers to eastern Germany.

In the economic sense, the German reunification represents a continuous exogenous shock of dimensions, not experienced up to now. 6 For private business and the representatives of economic policy could not anticipate this event with all its resulting effects and the various adjustment processes which are becoming necessary. It caused a dramatic change in the scarcity relationships on the goods and factor markets.

At first encouraged by the advantageous exchange rate (ca. 1: 1. 8) for currency and bank'assets at the introduction of the D-Mark in the former GDR and later through the large West German transfers the purchase of western products rose rapidly, so that in 1992 the domestic demand in the new federal states amounted to almost twice that of their gross domestic product.7 This gigantic gap of nearly two hundred billion D-Marks led to a heavier use and expansion of western German capacities as well as to sharply increasing imports (especially from the most important sources in West Europe) with the result that the German balance of payment surplus, which had existed since the early 1950s, turned into a deficit.8 The ethnic German immigrants and commuters from the new federal states also contributed to an increase in production in western Germany. Out of the total growth in employed in western Germany of some two million from 1989 to 1992, more than a million were immigrants and commuters. Since most of these were highly skilled workers, they probably had a major share in increasing production potential and in reducing unemployment in western Germany by about 300,000 in this period, for their employment also created employment for the less qualified. However, as a result of the steep increase in goods demand some structural weaknesses in the German economy were temporarily papered over and are only now coming into view again (e.g. in the automotive industry).

The scatcity relationships have also changed completely on the factor markets. The introduction of the currency union in effect revalued the East German Mark by about 400% while at the same time wiping out all existing protectionist

6Cf. o. Issing, "Gesamtwirtschaftliche Folgen des deutschen Eingigungsprozesses." Talk at the Zermatt-Symposium on Aug. 8, 1993 in Zermatt, Switzerland. Published in Deutsche Bundesbank, Ausziige aus Presseartikeln, No. 11, Aug. 11, 1993, Frankfurt 1993.

7 On the following exposition, especially the figures, cf. Issing, op. cit.

8Cf. the paper by Willy Kraus in this volume.

11

safeguards in foreign trade. If we consider further the drastic wage increases agreed to with the aim of adjusting East German wages to western levels by 1995-a goal which still hasn't been abandoned-and a productivity level which at the beginning amounted to just 30% of the western rate, it is easy to see why most of the capital stock of the fonner GDR has become economically worthless. The resulting loss of jobs led to a considerable unemployment rate in the new federal states (officially about 15%). The following figures show the speed of wage increases agreed to by unions and management for eastern Germany: whereas per capita income in the latter half of 1990 amounted to 34.5% of the western German level (productivity was only 29.5%), this had grown to 47% in 1991 (respectively 29%) and in 1992 even 61.5% (resp. 35%), so that the unit wage costs (wage costs per unit of GDP) in eastern Gennany finally were three­quarters above the western German level. 9 This breakneck wage adjustment occurred largely through western German union pressure. Otherwise, the great potential of ch~per labor in the East could have slowed down wage increases in the West. Therefore, an expansive wage policy was used to eliminate an uncom­fortable competitor in the East and stabilize -at the price of higher unemploy­ment-the wage cartel in the West. But not only in eastern Germany, in western Gennany as well wage policy was pushed through without regard for the changed scarcity relationships on the labor market. Here too, wage raises went far beyond productivity growth, with the result that unit wage costs rose in 1991-1992 by 9.5%, i.e. as much as in the five years previously. The negative effects of this type of wage policy ("steady as it goes") for monetary stability, growth and employment have now become apparent. Only in the wage negotiations in the fall of 1993 has a certain restraint been shown.

Clinging to the status quo and the assumption of new state tasks without cutting back on old ones has led to an overstraining of the state budget. If nothing is done soon to change this, then growth and quality of the production location Gennany may be pennanently damaged. I should like to explain this at more detail. 10

The growth of new state activities led in 1993 alone to a public transfer of resources from western to eastern Germany amounting to 140 billion marks. 11

Public transfers from public budgets alone amounted to about 4.5% of the western German social product and is thus much larger than the loss of income in the period from the mid-70s to the early 80s ensuing from the worsening tenns

9 Cf. Issing, op. cit.

10Cf. especially for the figures Issing, op. cit.

I I Calculated as total amount of payments by western Getman local government and social insurance, less the revenues from the new states; not included are (net) allocation of interest-reduced credit (1993: about 25 billion DM) and the various assistance payments by the Treuhand (in 1993 a deficit of about 38 billion DM is expected).

12

of trade arising out of the oil price explosion. From an eastern German point of view it amounts to half of their social product. Transfer flows of this dimension cannot be maintained forever, moreover they create a moral-hazard problem. The parties in wage negotiations would show little inclination to restraint in wage agreements if they can assume that the consequences from their mistakes will be ironed out by public finance policy.

The assumption of new state tasks in the course of the unification process, without dropping old ones, has also led to an increase in the government's share of expenditures in the GNP to rise from 46.75% in 1989 to 54.5% in 1993, though it is possible that the role of supplementary and special budgets hasn't been even adequately considered. The finance demand of all public budgets (local governments, social insurance, Treuhandanstalt, rails and post) is also continuing to grow. Whereas it amounted to nearly 180 billion DM in 1992, it is likely to be some 230 billion DM in 1993, or about 7.5% of the GNP (as compared to 0.5% for the old Federal Republic in 1989). Public sector expenditure thus amounted to about 90% of domestic savings in 1993 as compared to less than 5% in 1989.

Aside from state expenditures and public debt, the burden of contributions (taxes and social security payments) has risen steeply and has even reached a negative record height for the post-war period. Thus, the tax load for the entire economy is again higher at present than prior to the income tax reform of 1986/1988/1990 and the total rate of contributions (according to National Income Accounts classifications) rose in 1992 to 43.75 % of the GNP, the highest rate since 1949. Thus, Germany is one of the industrial nations with the highest rate of taxes and contributions and will probably grow more so in the next few years, since, according to estimates, the increases now in the tubes will cause the rate to grow to about 46 % by 1997 (final year of the mid-term financial planning). 12

All this demonstrates the urgent need to consolidate public budgets by radically weeding out all unnecessary state expenditures in order to win some breathing space for reductions in taxes and state debt. It is high time to realize that the German reunification process has changed the scarcity relationships on the goods and factor markets in East and West Germany and that adjustment processes are necessary in the West. It must also be realized that building up eastern Germany is not a purely governmental task-though the political discus­sion might lead all economic laypersons to think so-, but the far larger part of the capital need for creating new jobs must be provided by private investors from at home and especially from abroad. The state must create location conditions in western as well as in eastern Germany which will succeed in attracting investment capital, especially in the East. Or more generally, only by "attracting in" mobile production factors can the productivity of immobile factors (mainly labor) be

12Cf. Issing, op. cit., for all figures.

13

increased. 13

3 On Western European Integration

Following the close results in the referendums on the Maastricht treaty in Denmark, France and Great Britain and the decision by the German Supreme Court on October 12, 1993 the treaty became effective on November 1, 1993. Can we assume from the fact that Germany was the last member of the European Union to ratify the treaty that there is little willingness to integration? This question we may clearly answer with no. The great scepticism in many EU nations (not only in Germany) toward the Maastricht treaty and the "tired of Europe" feeling which has turned up in the last few years-some even talk of a deep crisis of loss of direction--has a lot to do with the contents of this treaty, especially with the centralization and integration policy strongly facilitated by it.

On the other hand, the. Single Market project, initiated in 1986 by the Single European Act and officially in force since the start of 1993 (though still not complete), has largely been accepted by the population and can be seen as a great success. The formulation of the four basic freedoms of unlimited movement for labor, capital, goods and services within the EU as a goal and the creation of the necessary instruments for their realization was, in contrast to the Maastricht treaty, opted for as a liberal integration approach, i.e. market integration. Herein the emphasis is on open markets, freedom and competition, quite in contrast to earlier efforts in Brussels to achieve integration through a more or less total ex ante harmonization.

In market integration, however, only sectoral minimum norms valid throug­hout the EU are prescribed, otherwise the existing national regulations are mutually recognized. Thus, the principle of the place of origin is recognized which allows each member state to set standards and regulations going beyond the minimal norms, but they are not allowed to restrict free trade in the single market. Therefore, competition between regulatory systems became possible and, by that, a growing together of markets.

The .. final degree and concrete optimal form of harmonization of norms, standards and regulations need not be known in advance to some bureaucrats in Brussels and thence be enforced by them from above, as necessitated by in­tegration policy. There is far more trust placed in competition as a process of discovery in which knowledge of the best solution need not be centralized. If mutual recognition is accepted, "the location and production conditions of other EC-nations will all the same become domestically effective-a completely new situation, since formerly the conditions of the target nations were always decisive

13Cf. the paper by Chr. Watrin, in this book.

14

for market access. ,,14 This new type of location competition puts a strong adjustment pressure on politicians, unions, management and interest groups, since economic entities are now enabled by the four freedoms to avoid national regulations (e.g. through capital transfers, capital flight, etc.). National policy is thereby subjected to a continuous and stringent control which limits its room for maneuver and raises its efficiency.

The resulting loss of power to politicians, bureaucrats and interest groups has mobilized opposing forces which find expression in the Maastricht treaty and its preference for integration policy and ex ante harmonization, creating oppor­tunities for a stronger centralization. This can put a break on the competition of regulatory systems, laid down in the single market to promote prosperity, if the cartel of politicians (and interest groups) so decide. IS Democratic controls of the Council of Ministers and the Commission by the national parliaments and the European Parliament are, despite some corrections in the Maastricht treaty, by no means sufficiently ordered.

As opposed to this, there is a clear extension of powers for the Community, as stipUlated in Article 3 of the Treaty on the European Union (TEU). In this there are 20 areas of activity named, including industrial policy, trade policy, research and technology policy, social policy and even cultural policy. Of course, in Article 3b of the TEU the subsidiary principle is introduced, according to which the Community should only take action, "if and as far as the goals of the measures being considered cannot be achieved at the level of the member states .... " But since, according to general legal opinion, this regulation is not the kind of right enforceable through courts, it can only be considered as a statement of intent without any practical effect on politics. A clear division of powers between the Community and the member states is not established and thus, it is not certain which activities will gravitate in the future to Brussels. It is this which disturbs many citizens.

It would have been better, based on the principle of subsidiarity and other sensible criteria to circumscribe exactly the powers ceded to the Community, to set these down in a treaty and have them subject to control by the European Parliament. All powers not specifically set down in this treaty would remain with the member states. If this way had been taken, the catalogue of powers enumera­ted in Article 3 would have shrunk rapidly. In the economic view, community­wide regulations are only justifiable and necessary when they: - guarantee the four basic freedoms and market integration, - enable cause-related accountability for external effects crossing borders and - achieve an expansion and price-reduction in production of public goods

14s. Risch, "Harmonisierung der Wirtschafts- und Sozialpolitik in der EG?," Weniger Staal, Mehr Marlct - Wege aus der Krise, ed. N. Walter, Munich and Landsberg am Lech 1993, p. 195.

ISCf• R. Vaubel, "Die Politische Okonomie der wirtschaftspolitischen Zentralisierung in der Europiiischen Gemeinschaft," lahrbuchfilr Neue Politische Okonomie, Vol. 11 (1992): pp. 30-65.

15

necessary. 16

The most concrete regulations in the Maastricht treaty of course are concerned with the creation of a European Monetary Union and setting up a European Central Bank at the third stage which would be the sole issuer of a community currency and authority for European monetary policy. The political intention is to eliminate Germany's monetary hegemony, which had arisen from the -unintentional-development of the DM to a key currency in the European Monetary System (EMS) in the last few years, through europeanization. In order to obtain Germany's placet and thus its integration, the partners were even willing to organize it along the lines of the German Bundesbank and to make admittance to the European Monetary Union depend upon the fulfillment of certain convergence criteria.

There is a whole series of individual points which ought to be criticized, but at another time, another place. Instead we will briefly treat with the central weakness of th~ Maastricht regulations on the European Monetary Union, the fundamental attempt to achieve the monetary union exclusively via integration policy and thus without currency competition (market integration). This is already evident in the Delors report, in which monetary competition is sweepingly rejected as an inadequate route to the European Monetary Union. But if stock is set exclusively in integration policy, then politicians, bureaucrats and their advisors must know in advance the optimal solution for Europe. Apparently the authors of the Maastricht treaty feel this was so. They set up that national monetary order which in the past had had the best track record on price level stability, Germany's D-Mark, as a model for constructing the future European monetary system. They thought they knew it well enough to recognize as the central element the legal obligation of the central bank for price stability, the independence of the central bank and the prohibition of financing public budget debts through monetary policy.

Indeed, the Maastricht treaty contains all these important characteristics of German monetary order. In addition, convergence criteria were formulated, which the politicians like to call stringent, which would allow only those nations to join the European Monetary Union, that had reached a high degree of stability and were thus economically mature enough for monetary union. In this manner a hardening of the exchange rates in the EMS was going to be provided for, such as could finally be fixed for all times in the transition to the final stage. It was implicitly assumed that, when the "stringent" convergence criteria were maintai­ned, the German Bundesbank would transfer to the European Central Bank its most important capital, its reputation for a strictly stability oriented monetary policy.

In the discussion on the treaty, partisan sources have repeatedly pointed to the great stability of exchange rates existing in the EMS since 1987 and celebrated

16Cf. Risch, op. cit., Vaubel, "Die Politische Okonomie," op. cit.

16

this as a sign of the high level of convergence already achieved in Europe. There was also the massive attempt to create the impression that the European Monetary Union could be started in 1997 or 1999 more or less with the parities that existed at the beginning of the 90s. The early criticism of these arguments coming from economists17 were confirmed by the turbulence which upset the exchange markets from autumn 1992 until summer 1993. It demasked the political fixing of exchange rates as a policy failure and exposed without mercy the existing deficits in the convergence. Giving up the narrow parity bands in the EMS at the beginning of August 1993 was at first a defeat for plans up till then, but it also meant more room for play in currency competition, which in the framework of the EMS is a competition for the position of anchor currency.

Recent events on the currency markets clearly show the danger inherent in the route prescribed by the Maastricht treaty of integration policy. They teach us that grave mistakes can be made through the planned political fixing of exchange rates. On the one hand it is highly doubtful whether the established criteria correctly measure the convergence necessary for joining the European Monetary Union. On the other hand a close study of the treaty text shows that the final decision on admission of a member state to the European Monetary Union lies with the European Council of heads of state and! or governments, who can for political reasons ignore the convergence criteria. It is therefore a political decision which is going to be made and not, as the convergence criteria might indicate, a halfways economic one. 18

Further, it must be pointed out, that in the Maastricht treaty not all elements of the German monetary order will be transferred to the European level. As with the convergence criteria, we see here that politicians and bureaucrats just pretend to be knowledgeable in fields in which they are fairly ignorant. One very important element that shaped the course of German monetary policy in the past is missing 'from the Maastricht treaty and indeed cannot be transferred to the European level. I mean the control over the German Bundesbank by voters still very sensitized by two catastrophic inflationary periods in the past. The members of the central bank council must fear, if they allow a high rate of inflation to develop, that the independence of the German Bundesbank would be abolished. This could be achieved by a simple parliamentary majority. They would then also suffer a decline in prestige, power and income. This is an important incentive to maintaining monetary stability. Since this element is lacking in a future European

17Cf. the manifesto by more than 60 German economics professors, "Die wiihrungspolitischen Beschliisse von Maastricht: Ene Gefahr fUr Europa." Reprinted in Deutsche Bundesbank, AuszQge aus Presseartikeln, No. 41, June 11, 1992; W. Kastel'S, "Europiiische Zen1ralbank und Preisni­veaustabilitit," Hamburger JahrbuchjUr Wirrschaft- und Sozialpolitik, Vol. 36, 1991, pp. 155-167; R. Vaubel, "Grundfragen einer gemeinsamen WahrungspoJitik," E. Dichtl. ed., Schritte zum Europ4ischen Binnenmarlct, Munich 1990.

18Cf. W. Kastel'S, "La conception de la stabilM dans Ie traite de Maastricht: interpretation et critique," Trois defts de Maastricht-Convergence cohesion, subsidiariti, ed. P. Maillet, Paris 1993.

17

monetary order, it may be expected that the degree of monetary stability in Europe after entering the third stage will be lower than in Germany in the post­war era. 19

Membership for countries not possessing sufficient monetary and real con­vergence will increase demands for transfer payments from cohesion funds and other sources. But if the other EU nations are not willing to bow to these demands, pressure to raise protectionist barriers vis a vis third countries will grow. This will probably increase still further once the possibilities of ex ante harmonization, contained in the treaty, come into use, e.g. in social policy. Since this would raise costs more steeply in the weaker EU member states, their competitiveness with newly industrialized and developing nations would suffer. If their demands for protectionist barriers are satisfi~d the temptation is strong, because the other EU member states might view this as being cheaper than transfer payments-then the trend to a "Fortress Europe" would increase with all the dangers for our prosperity inherent.

The Maastricht treaty with its powerful preference for integration policy thus creates many opportunities for economically inefficient solutions, which would reduce the welfare of all EU citizens. It conjures up dangers for the European idea and might lead to an eventual disintegration of Europe.

4 On Integration Willingness Toward Central and Eastern Europe

The convulsions in Central and Eastern Europe which started at the end of the 80s not only set a transformation process in these countries in motion that would tum them into market economies and parliamentary democracies but has also intensified structural change in Germany, Western Europe and beyond. This just hasn't made itself really noticed in Western Europe up to now. Since the vast majority of resposibilities in trade policy has been ceded to the EU, we must now examine the integration willingness of the EU toward the Central and Eastern European nations.

An ,increased integration of these nations in international trade offers all participants the opportunity to raise welfare. In this way the advantages of an international division of labor can be better employed which, however, pre­disposes the willingness to open markets and to permit the necessary EU domestic structural adjustments. There must be no attempt to prevent them by protectio­nism-even in the form of an industrial policy to preserve structures. An indication of the great compulsion to transform structures may be seen in the far lower hourly wages paid in Central and Eastern Europe. Whereas they amount to

19Cf. KOsters, "Europiische Zentralbank und Preisniveaustabilitiit. " and "La conception de Ia stabilite dans Ie traite de Maastricht: interpretation et critique," op. cit .• for the full arguments.

18

nearly DM 23 in Western Germany (1992) and DM 13 in Eastern Germany, in Poland they average about DM 6, in the Czech Republic DM 3, in Estonia less than DM 2 and in Russia even lesS.2O The more advantageous location conditions for different production lines in the countries of Central and Eastern Europe have not yet had much effect on the structural transformation in Western Europe because, on the one hand, restructuring in Central and Eastern Europe (pri­vatization, setting up new plants, creating stable framework conditions) takes time and, on the other hand, the EU is in no hurry to open up its markets.

For now it should be positively noted that the EU has signed association treaties with the Visegrad states (poland, Hungary, CSFR) in December 1991 and with Bulgaria and Roumania early in 1993. In these European agreements-which are very similar-the major point is concerned with tearing down trade barriers. They also contain regulations on economic and financial cooperation, freedom of establishment, capital movements, cultural cooperation and the political dialogue. Since some stipulations fall within the responsibility of individual EU member states, they must be ratified by the national parliaments which are not in any hurry to comply. (All the Visegrad states ratified the treaty in 1992, but follo­wing the separation of the Czech Republic and Slovakia the treaty must formally be renegotiated with both parties.) The parts referring to trade policy, for which the EU is responsible, came into force prior to the rest of the treaty by an interim agreement, for the Visegrad states on March I, 1992, for Roumania on May I, 1993 and for Bulgaria in the summer of 1993. The main goal of the trade policy agreements is the step-by-step setting up of a free trade area for industrial products by 1997. In this the EU, as the economically stronger partner, has to move faster and farther towards liberalizing its imports than the other side.

However, and this is the starting point for criticism, import hindrances on the route to a free trade area are only to be generously abolished for those products for which the treaty partners are not competitive. On the contrary, access to EU markets remains difficult for competitive products from the Central and Eastern European nations, especially for goods from the textile, clothing, iron and steel and agricultural sectors. This is true even for smaller quantities. Thus, German textile imports from Central and Eastern Europe rose in 1992 by 27.5% to a total of four billion marks, but this was only 7% of all textile imports, valuing at DM 56.5 billion. "The Europe agreements thus are no guard against protectionist measures by the EC. "21 In commerce between the EU and the Visegrad states the EU exports rose in 1992 faster than its imports, so that the export surplus of the

2Oef. Klodt, op. cit.

21H. Machowski, Grundprobleme der Integration Ostmitteleuropas in den gesamteuropdischen WiT1Schoftsraum, Manuscript 1993.

19

EU grew by more than $ one billion to $ 2.5 billion.22 But to place all blame on the Europe agreements would be somewhat rash.

The most important sales market for exports from Central and Eastern European nations is Germany. Out of all their exports into the EU 45.6% went to Germany in 1991, in 1992 even 46.8%. In 1992 the EU imports from Central and Eastern Europe expanded by 2.2 billion BCU (+ 6.5%), whereby two-thirds (1.4 billion BCU) went to Germany.23

As with the German unification process, the necessity of structural change resulting from the transformation in Central and Eastern Europe has been underestimated for too long. On the international level it is a far larger challenge than the oil price shock of the 70s and the debt crisis of the 80s. A defensive strategy of protectionism and structural conservation is by no means adequate and would only bring about a great welfare loss. Only an offensive strategy of opening up the markets and structural change can, despite all hardships in individual ~ which the adjustment processes may cause, welfare gains for the public as a whole be achieved.24 If the EU fails in the "architecture of great Europe, II as Jacques Delors put it, jUld if it is not able, by opening up its markets, to create the preconditions for levelling out the prosperity incline from west to east, then there is the real danger of economic crises, political tension and serious problems of security policy arising, of which an uncontrolled migration to western Europe would only be one result. But if we let things come so far, any solution will be far more expensive than a rapid opening up of the markets now.

5 On Global Economic Integration Willingness

Up to now we have only discussed regional integration problems. Implicitly or explicitly we hav:e proceeded from the assumption that there are three spheres of influence in the world and have assigned responsibility for order therein to each of the leading powers: to the United States for North and South America, to Japan for the East Asian Region and to the EU for Europe and Africa (Re­gionalism in international economics).

22Cf. Deutsches Institut fUr Wirtschaftsforschun (DIW). "IndUS1riegiitereinfuhren der EO aus Ost und Siid: Handelspolitik und Entwicldung. Abbau von Handelsbarrieren der EO gegenuber Mittel- und Osteuropa." Wochenbericht. Vol. 60. 1993. pp. 317-326.

24Cf. H. Klodt. "Der Fall des Eisernen Vorhangs und die Arbeitsteilung in Europa: Herausforderun­gen und Chancen." Lecture at the 27* Talk at the List-Gesellscbaft e.V .• Verlinderte Arbeitsteilung in Europa - Brauchen wir eine Industriepolitik? September 23-24, 1993 in FrankfurtIMain, Manuscript.

20

This is also reflected in the program of this conference. But we should not overlook the fact that regional integration represents only a second best solution. There are only no negative effects for international trade, when the degree of protectionism toward third parties does not increase. Merely in this one case do the GATT regulations (Article 24: Customs Unions and Free Trade Areas) permit an exception from the most favored nations principle or the regulation on non­discrimination.

The best solution in any case-despite all the arguments batted around about strategic trade policy-remains world-wide free trade. Regionalism, on the other hand, could lead to the development of isolated trade blocs and thus to a disintegration of the world economy. Free trade must therefore be a political goal and be enforced internationally.

However, as the repeatedly postponed conclusion of the Uruguay Round showed, which was only concluded in December 1993 after great effort, there is little enthusiasm and political will for free trade among all major participants. The Amencan administration, formerly an advocate of free trade, is flirting with the idea of strategic trade policy,. In the EU protectionist currents conflict with free trade positions, though the supporters, Germany, the Netherlands and Great Britain, are usually inclined to give in to maintain the common consensus. And no one expects a vigorous engagement for free trade from Japan.

The results of the Uruguay Round must therefore be rapidly converted into action everywhere and in real practise accepted by all trading partners. In addition, a consensus must be found for those areas which were glossed over and a beginning made to eliminating all conditions and acts which limit international free trade. Then it is precisely for the reasons mentioned above for an intensified world-wide economic structural transformation that reliable welfare-enhancing conditions are needed for international trade.

21

List of References

DIW (Deutsches Institut flir Wirtschaftsforschung); "Industriegiitereinfuhren der EG aus Ost und Siid: Handelspolitik und Entwicklung. Abbau von Handels­barrieren der EG gegeniiber Mittel- und Osteuropa," in Wochenbericht, Vol. 60 (1993), pp. 317-326.

Issing, 0., "Gesamtwirtschaftliche Folgen des deutschen Einigungsprozesses." Talk at the Zermatter Symposium in Zermatt on Aug. 8, 1993. Published in Deutsche Bundesbank, Auszuge aus Presseartikeln, No. 11, Aug. 11, 1993, FrankfurtlM.

Klodt, H., "Der Fall des Eisemen Vorhangs und die Arbeitsteilung in Europa: Herausforderungen und Chancen." Talk at the 2'fh Gespriich der List-Gesell­schaft e. V., "Veriinderte Arbeitsteilung in Europa - Brauchen wir eine Industriepolitik?" held Sept. 23-24, 1993 in FrankfurtlM. Manuscript.

Kosters, W., "Europiiische Zentralbank und Preisniveaustabilitiit," in Hamburger Jahrbuchfor Wirtschafts- und Sozialpolitik, Vol. 36 (1991), pp. 155-167.

Kosters, W., "Freihandel versus Industriepolitik," in Wirtschaftsdienst, Vol. 72, No.1, 1992, pp. 49-56.

Kosters, W., "La conception de la stabilite dans Ie traite de Maastricht: inter­pretation et critique," in Trois defis de Maastricht-Convergence cohision, subsidiarite, ed. P. Maillet, Paris 1993.

Krugman, P. R., "The Narrow and Broad Arguments for Free Trade," in American Economic Review, Papers and Proceedings, Vol. 83 (1993), pp. 362-366.

Lorenz, D., "Europe and East Asia in the Context of Regionalization: Theory and Economic Policy," in Journal of Asian Economics, Vol. 4, No.2, 1993, pp. 255-270.

Machowski, H., Grundprobleme der Integration Ostmitteleuropas in den gesamt­europiiischen .Wirtschaftsraum, Manuscript 1993.

"Manifest von iiber 60 Professoren, Die wahrungspolitischen Beschliisse von Maastricht: Eine Gefahr fUr Europa," reprinted in Deutsche Bundesbank, Aus­zuge aus Presseartikeln, No. 41, June 11, 1992.

Risch,. B., "Harmonisierung der Wirtschafts- und Sozialpolitik in der EG?" in Weniger Staat, Mehr Marla - Wege aus der Krise, ed. N. Walter, Munich! Landsberg am Lech 1993, pp. 191-211.

Vaubel, R., "Grundfragen einer gemeinsamen Wahrungspolitik," in Schritte zum Europiiischen Binnenmarkt, ed. E. Dichtl, Munich 1990.

Vaubel, R., "Die Politische Okonomie der wirtschaftspolitischen Zentralisierung in der Europiiischen Gemeinschaft," in Jahrbuch for Neue Politische Okono­mie, Vol. 11, 1992, pp. 30-65.

Key Factors for Japan's High Rate of Economic Growth

Tolrue Shibata!

Japan has enjoyed a comparatively high rate of economic growth throughout the post-war period-despite the bursting of its bubble economy several years ago. However, it was not until about 1955, ten years after the end of the second world war, that a dramatic economic recovery began. In 1960 the government adopted a development policy known as the Inc;ome Doubling Plan. The ambitious goal set in this plan of doubling people's income within ten years was actually achieved in a mere seven years. How did Japan come to enjoy such rapid economic growth? For an answer, we should focus our attention on two crucial factors: finance and the public sector.

I The Role of Finance

1.1 People's Savings as an Important Source of Funds

Until the mid-1950s, Japan's economy had been heavily dependent upon agricul­ture, in particular rice production. Highly labor-intensive farming methods were developed, in which villagers worked hard in cooperation to secure high-yield harvests from a limited acreage. Values, customs and usages of the Japanese are rooted in these agricultural practices: work hard and save up the surpluses for lean years. And in fact, the country has always been subjected to various kinds of natural disasters, typhoons, earthquakes, volcanic outbreaks, heavy storms, droughts and early frosts, which can ruin a harvest. People had to save up rice to guard against such emergencies. Later, money has come to replace rice. Between 1979 and 1989, Japan's saving ratio lay in the 15-20% range, much higher than in other industrialized nations (e.g. 6-8% in the USA).

Rapid economic growth since the late 19508 was accompanied by rapid urbanization. Many rural young people migrated to Tokyo and other large cities where the government was offering a new incentive for these savings-oriented

IProfessor of Economics. Tokyo Keizai University.

24

Japanese: the my home principle encouraging owner-occupancy in housing. (At that time, house ownership was still feasible for the dilligent and thrifty.) The Housing Loan Corporation, one of the government financial institutions establis­hed in 1950, helped realize the my home dream with low-interest, long-term loans for owner-occupied housing. Farmland in the suburb districts surrounding large cities was redesignated as residential development areas, resulting in a hike in land prices and the subdivision of housing lots.

The average size of a housing lot in urban areas is incredibly small-often less than 80 m2 (one-fiftieth of an acre). For example, in the residential areas of Tokyo 826,015 individuals owned 259.005 million m2 in 1979 of which 354,220 individuals (42.9%) had less than 100 m2 housing lots.2 It's no wonder that foreign visitors refer to houses in Tokyo as rabbit hutches.

Land subdivision continued unabated since no measures to adequately control land use were taken, resulting in highly congested urban and suburban areas, such as f<;mnd in Tokyo and Osaka.

In the last ten years a new factor has emerged encouraging people to save money: the "Aging of Society." Japan's poorly endowed social security system is forcing the middle-aged to save up in preparation for retirement.

The savings accumulated for these two reasons, house-owning and retirement preparation, have thus become a major source of financial funds for the country.

1.2 Financial Institutions

Money saved by the people is deposited with banks, credit unions, insurance companies, the post office and other financial institutions.

During most of the post-war period, the funds accumulated have been expen­ded for industrial expansion. For example, in 1973 housing loans in Japan made out only 5.2% of all loans, as compared to rates in 1971 of 45.4% in the United States, 62.2% in the United Kingdom, 32.4% in West Germany and 33.0% in France.3 It was mainly companies which borrowed money from the financial institutions for plant equipment investments and technological innovations. When we examine the average capital structure for 1965, only 24% was equity capital; the remaining 76% consisted of loans, of which 49% were short-term and 27% were long-term loans. The corresponding rates for other countries in 1964 are: 69% equity and 31 % loan capital in the U.S., 63% and 33% in the U. K. and 41 % and 59% in West Germany.4

1'okyo Metropolitan Government, Land Ownership in Tokyo, 1979.

3Ministry of Finance, Finance (monthly), August 1973.

40huchi et al., A Chnrted Japanese Economy, Iwanami 1967.

25

1.3 Industries

With money borrowed from financial institutions, Japanese companies continued to buy land for the expansion of production facilities and then to equip these plants with the most modern technology available. This investment ran under the heading of tax-deductable "expenses," thus enabling the companies to reduce the tax load normally due-not only the national corporate income tax, but local business taxes and local inhabitant tax, imposed according to the national tax computation, as well. Tax arrangements benefitting business provided incentives to corporate leaders to accelerate production expansion.

2 Abundant Supply of a Homogeneous and Young Labor Force

Of all the post-World War II reforms pushed through by the Allied Occupation Administration between 1945 and 1952, it is the land reform which is considered to have been the most successful in effecting fundamental changes in Japan. Land belonging to landlords was redistributed among tenant farmers and by 1950 land tenancy had been largely eliminated.

Even though the amount of land owned by each individual farmer was quite small-about one hectare or 2.5 acres on an average, excluding Hokkai­do-farmers were happy to be working their own land. Productivity rose steeply due to new labor-saving technologies such as pesticides, chemical fertilizers, trac­tors and power cultivators. Since the Agricultural Land Control Law precluded absentee landlordism farmers had to cultivate their own land and increased productivity resulted in massive labor surpluses.

In the meantime, the national government had enforced the educational reforms extending compulsory education from six years to nine years. Even though local government was responsible for providing compulsory education, the national government had established a system of subsidies to provide for a standardization of education regardless of the financial strength of local school districts.

Traditionally, the Japanese have accorded education a high priority, since better education was usually a guarantee for better jobs and imprOVed social status. Thus, the people--especially in the lower strata-smoothly adapted to the new school system. School children might speak their local dialect at home, but in the schools they learned to speak and write in standard Japanese, resulting in a large number of well-trained young people ready to step into jobs in the factories and offices.

This combination of factors, surplus labor in the villages and standardized education, has led to a massive migration of young people from the rural districts to Tokyo and other large cities. During the high-growth period it was not uncommon at the end of the academic year in March to see trains filled with the graduates of junior high schools setting out from their home towns for their

26

future work locals. These young and dynamic people easily adapted to the new life in the cities

and quickly learned the new technologies. In the period of rapid economic growth, demand for these young people (known as II golden eggs ") remained strong. The country experienced no manpower shortage and did not have to rely on foreign workers until the early 1980s.

The wage level of young workers was low under Japan's seniority system, but they could look forward to future wage increases and promotions. New jobs were easy to find and the unemployment rate---rul well as the rates for school drop-outs and crime---remained low.

3 The Role of the Public Sector

3.1 The-Taxation System

Every government relies on taution to raise revenues for its operations, but the systems and methods of taxation vary from country to country. Many developing countries are largely dependent upon indirect taxes, e. g. on agricultural product: such as sugar and tobacco, but generally this is not sufficient to meet rising expenditures. With increasing development the portion of revenues coming from direct taxes such as personal and corporate income taxes increase proportionately. As Table 1 shows, direct taxes make out three quarters of Japan's present tax take; personal income tax has the largest share.

It is noteworthy that income tax imposed on workers' salaries and wages amounted to 20.7% of the total national tax revenues in 1992. In 1994 a family (two parents plus two children) was liable to national income tax if annual income exceeded 3,277,000 yen. Both national and local income taxes are imposed on employee wages and salaries and are deducted from pay checks, thus ensuring total coverage with no room for evasion. In 1992 some 41,246,000 employees earned a total of 187.6 trillion yen and paid 13.719 trillion yen in national personal income tax.

27

Table 1. National Tax Revenue, 19925

Billion ¥ %

Direct taxes 40,552 70.7

Income tax 23,231 40.5

a 18,473 32.2

b 4,759 8.3

Corporation tax 13,714 23.9

Inheritance tax 2,746 4.8

Land value tax 520 0.9

Others 341 0.7

Indirect taxes 16,844 29.3

Consumption tax 5,241 9.1

Liquor tax 1,961 3.4

Tobacco tax 1,019 1.8

Gasoline tax 1,563 2.7

Petroleum tax 505 0.9

Motor vehicle tonnage tax 693 1.2

Customs duties 916 1.6

Stamp revenues 1,571 2.7

Local transfer taxes

Consumption tax 1,310 2.3

Local road tax 380 0.7

Motor vehicle tonnage tax 231 0.4

Others 1,454 2.5

Total 57,396 100.0

In contrast, the revenue service is rather weak on imposing taxes on capital gains, e.g. on windfall gains from land speculation or stock market manipula­tions.

5Ministry of Finance, Zaisei Kinyu Tokeigeppo (Special Issue on National Taxes), April 1994. a=imposed on wages, salaries, interest, etc.; withheld at sOUTce b=imposed on business income, Teal estate income, etc.; taxes due calculated according to

taxpayer's declaration.

28

3.2 Public Expenditures for Strengthening the Industrial Base

The major portion of the tax revenue has been expended on public works projects. In the course of Japan's rapid economic progress, top priority in the national general account budget was accorded public works. For example, in 1964 this budget amounted to 3,255.4 billion yen; public works added up to 19.5% as compared to 13.2% for social security, 12.7% for education and science and 9.3% for national defense.

Any country aiming at achieving rapid economic growth can only do so by improving its infrastructure: roads, port and harbor facilities, electric power networks, industrial water supply systems, etc. While many developing nations have rich natural resources at their disposal, they are frequently stymied by the difficulties of improving their weak infrastructure.

Japan, on the other hand, lacks natural resources and is located on a somewhat isolated ~sland group in the western Pacific; it is forced to import all essential raw materials such as crude oil, iron ore, coal and wheat (a total of 700 million tons a year). It is indispensablt: for the economy that these materials be trans­ported to industrial areas without delay and that manufactured goods are expidited smoothly. Ready transportation and good communications among industrial areas are by all means the most important factor for Japan's economic development.

The government refers to this prerequisite infrastructure for economic activities as the industrial base and, in order to strengthen this base, has devoted a large portion of the state budget to public works. In 1964, for example, the expenditu­re for public works amounted to 635.8 billion yen-or 19.5% of the state budget. Of this amount 43.2% went for road improvements, 16.1 % for erosion and flood control and 7.3% for the improvement of port and harbor facilities.

In addition to expenditures out of the general account of the national budget, large amounts from local government budgets and special accounts were spent on public works. The method of financing roads will be described shortly.

As mentioned above, private financial institutions played a vital role in providing large amounts of capital for industrial expansion and equipment innovation by manufacturers in the private sector. Public taxation was used for public works to strenthen the industrial base to pave the way for the manufac­turers.

3.3 Reciprocal Relationship between Road and Automobile

The automotive industry may well be the symbol of Japan's economic develop­ment. Prior to the Second World War Japan's automobile industry was small and autos-mainly Ford or General Motors-were generally imported from the United States. The industry started its expansion around 1955; in 1970 it sur­passed, in the number of vehicles produced, Europe's production. In 1980 the United States was overtaken. The number of vehicles (passenger cars as well as

trucks, in thousands) produced in 1991 was:

Japan USA Gennany France Italy UK

13,245 9,358 5,214 3,611 1,878 1,4546

29

In Japan nearly half of these vehicles (5,753 thousand) were earmarked for export in 1991.

Foreigners visiting the Toyota or Nissan works are usually impressed by the efficient kanban ("just in time") system. However, even few Japanese pay much attention to the financial or social background to high development rates.

Bigger and faster airplanes req~ better and stronger runways in a well designed airport. In the same way, a larger number of automobiles requires an improved road network, including both national highways and local streets and roads.

How has Japan financed its national road network? Starting in 1955, Japan imposed a number of stiff fuel taxes. These are known

as automobile related taxes and the take has been strictly reserved for road construction and maintenance. The gasoline that people buy at filling stations at present costs about Y 110 per liter or some $ 4.20 per gallon. Of this, Y 48.60 are gasoline tax and Y 5.20 local road tax. In other words, half of the money spent on gasoline goes for road construction. For liquid petroleum gas, a fee of Y 17.50 per kilogram has to be paid. These national fuel taxes are funneled into the government's "Special Account for Road Improvement" which is exclusively reserved for natioDaJ. road improvements. Local government imposes fuel levies as well: the prefectures collect a diesel oil delivery tax, Y 32.10 per liter, and in 1993 this added up to nearly one trillion yen or about $ 10 billion.

Now after forty years, the automobile related taxes have come to account for about one third of total road expenditures or Y 4,478 billion out of Y 12,898 billion in 1992.7

3.4 The Secrets of Postal Saving

The postal savings system in Japan, set up over a century ago in the 1880s, has

~issan Corp., Automobile Handbook 1992/1993.

7Ministry of Construction, Road Pocketbook, 1993.

30

now developed into virtually the world's most extensive financial institution. Even the largest bank in the world has four or five hundred branches at the most, but the postal savings system is based on 24,000 post offices located all over Japan, even on small isolated islands.

It has been easy for this government guaranteed financial institution to collect large amounts of money at low cost as compared to the commercial banks which have to pay to maintain their business (advertisements, etc.). This large amount of postal savings money enabled the national government to offer loans for public works at favorable conditions: lower interest rates-two or three percent lower than the commercial banks-and for longer terms, sometimes in excess of twenty years.

In addition to the general account budget, the national government has another system of financing, known as the "Fiscal Investment and Loan Program" or FILP. This is frequently called a 'second national budget' since it is about half the size of the general account budget. Postal savings, together with postal insurance funds and pension funds, are funneled into the FILP.

FILP plays a crucial role in road and bridge construction. The postal savings outstanding account as of August 1994 exceeded ¥ 190 trilli on (about $ 1,900 billion) and FILP lent more than ¥ 2,979 billion for road construction in 1992.8

In addition, local governments can issue road construction bonds and FILP often buys these local bonds.

4 Quo vadis Japan?

As I pointed out at the beginning, Japan has up to now enjoyed a high rate of economic growth over nearly a half a century of peace. This was achieved by granting priority to industrial efficiency rather than to the quality of people's living. This approach has resulted in mounting trade surpluses and seemingly in an everlasting increase in the value of the yen.

Part of of the income earned by the Japanese has been absorbed by national and local governments through various taxes. In spending these revenues, the government placed top priority on public works to strengthen the country's 'industrial base.

Another portion of people's earnings has gone into savings accounts at banks and the post office (and more recently, insurance companies). These private and public financial institutions have invested the money mainly in the form of industrial loans.

Major factors in strengthening the industrial base and expanding industrial activities have been young Japanese, recipients of a standardized education and eager to introduce advanced Western culture and technology. Up until 1990 or

SUp until 1971 Japan's yen value was fIxed at the rate of 1360 to $1. Since then it has changed several times, to YlOO at the beginning of 1995 and to less than Y90 at the end of March 1995.

31

so, demand had exceeded supply on the labor market and the unemployment rate hovered at a low two to three percent.

It may sound as if this article is a report on Japan's success story in the post­war period. In terms of economic progress this is so. However, there are signs of a crisis brewing and which are becoming more visible. It may reach a head in the near future, perhaps as soon as the tum of the century, as will be delineated below.

4.1 Education

The following is a letter to the editor printed in the New York Times of July 24, 1994:

"I normally fly Northwest and take JAL only in emergencies. This is. because I have more confidence in United States pilot crews than I do in those made up of Japanese. The education system in Japan teaches how to react, not how to act. Our educational system teaches us to think on our own and try to come up with new ideas and ways of problem solving. It is the opposite of Japan. As long as all is well things at JAL go by [the] book. It is [in] real emergencies that I am afraid of its pilots' inability to innovate."

This letter points precisely to the concern held by the Japanese: emphasis on cramming rather than developing the creativity of each student.

4.2 Low Birth Rate and the Aging of Society

The average life expectancy of the Japanese, which amounted to some fifty years in 1947, has increased by thirty years over the last half a century. At present, women reach an average 82 and men 78-the longest life-span in the whole world.

On the other hand, Japan's birth rate has declined drastically since 1974, the year of the oil embargo. Now the population of a country or a region will remain stable if women have an average 2.08 children, i. e. the number of births is in balance with the number of deaths. In 1993, however, the national average in Japan had dropped to 1.50 and in Tokyo to as low as 1.10. It is as though the one-child policy promulgated by the Chinese government were more valid and successful in Tokyo.

There may be various reasons preventing couples in Tokyo and other metro­politan centers from having children: the high cost of housing and education, and the abundant opportunities to enjoy leisure activities on their own. The number of women who choose a career over founding a family, who do not want to give up their freedom by marrying, is also increasing.

32

Rural areas, on the other hand, are experiencing both an aging of the popula­tion and a general depopulation following the mass exodus of younger people to the cities. Villages are populated by senior citizens and marriage ceremonies have become quite rare. The area of such depopulated villages, towns and even cities has expanded to comprise more than one third of the country.

As mentioned above (cf. Section 2) the wages of younger workers were kept low under the Japanese seniority system. Until recently, these young workers comprised the majority of the labor force and business leaders were able to take advantage of this fact to hold down labor costs and raise productivity. Companies could afford to pay higher wages to older workers under the traditional wage system.

The Japanese labor force, however, is aging. Many companies now have a majority of workers of forty years and older. The days when a large number of young employees worked hard and looked forward to a rosy future are over. Companies now face a new and difficult situation characterized by high labor costs and relatively low productivity.

4.3 Cities Planned and Shaped for Young and Dynamic Workers

4.3.1 Transportation

In terms of capacity and efficiency in transporting employees to their places of work, the transit systems in Tokyo and other metropolitan areas may well be the best in the world. For example, in Tokyo the Japan Railway Company's Chuo Line, connecting Tokyo's central business district with the western suburbs, runs computer-controlled trains every two minutes and ten seconds during rush hours, each carrying nearly 3,000 commuters in ten coaches. All trains are expected to be on schedule. (Station masters blanch when a train even runs only twenty seconds late.) Odakyu, Seibu and other private lines have extensive and sophisti­cated systems for operating different types of trains-from super-expresses, commuter expresses, semi-expresses down to local trains-all on a single track. Fast trains pass by locals waiting on side tracks in the stations.

These-systems transport over two million commuters every morning to Tokyo's central business district. All these trains are of course very crowded and passen­gers can hardly move; they are also often too dangerous for the elderly, for people in wheelchairs, for pregnant women and mothers with infants, at least during rush hours.

Assume that you are confined to a wheelchair and want to get on a bus. If you are in New York City, you have no problem, even though the city faces a perennial financial crisis. But if you are in Tokyo, the situation is more difficult. Buses in Japan are designed to carry as many passengers as possible, making no allowance for the problems of the elderly, the handicapped or mothers with children, who are all regarded as being economic drones. But the only reply the

33

transportation companies make to such reproaches is a simple, "Sorry, we are losing money because more and more people drive their own cars and the govern­ment gives us no money to provide such services. "

4.3.2 Housing

Housing is another aspect of urban life that has fallen victim to post-war industri­al expansion. Construction of public housing complexes (danchz) has been promoted by a public body named Jutaku Kodan (Japan Housing Corporation), established in 1955, and by local governments. Apartments built by the former were mainly for the middle-incomed and by the latter for low-incomed groups. The main purpose of the government housing policy has been to provide places to sleep for workers. Houses designed along this policy were not much different from railway sleeping cars: the standard unit of public housing was the 2DK, consisting of t}.vo rooms plus a kitchen-dinette area, averaging 550 square feet (about 51 m2). If occupied by a 'standard' family, a couple with two children, no one--not even the family father-has a room to him- or herself. Fathers (in most cases the family breadwinner) after all have been expected to work long hours-in expectation of overtime pay. In the morning they have to get up very early because commuting time to their place of work is also very long. Late at night they arrive home only to sleep in a room in which the children played and studied during the day.

Private railway companies also constructed similar housing complexes along their lines. These complexes in the suburbs were often named "such and such New Town," though in English translation this could just be "Bed Town. "

The Shift from a Net Capital Exporter to a Net Capital Importer - The Case of Germany -

Christian Watrin l and Malte Kriige~

1 The Statistical Evidence

Since the early 1950s Gennany has been steadily integrating into the world economy. With rising incomes and the opening of international capital markets, Gennany had assumed the classical role of a capital export country until the early nineties. Net capital exports became the rule, interrupted only by short periods of net capital imports (the last one from 1979 to 1981). Especially in the 1980s net capital exports and, correspondingly, current account surpluses reached unprece­dented levels. For example, in 1989 they amounted to more than 5 percent of the Gennan GOP.

During the entire post-war period, the sub-balances of the current account exhibited a rather stable pattern. The trade balance was continually in surplus and Gennan transfer payments were always above receipts. During the first two decades, the "invisibles" (balance on services) were in surplus, which during the 1970s, shifted to an unfavorable balance. Since the middle of the eighties, no clear trend has been discernable. But, two important components of the balance on services have exhibited a stable pattern: the deficit in the travel balance as well as net foreign capital income, have been increasing continuously.

Until recently, Gennan and Japanese developments in the balance of payments had a lot in common. Since 1982 Japan's current account has been in surplus. After strongly rising in the mid 1980s, the surplus declined slightly in the late 1980s. Similar to Germany, the trade balance was always active and the balance on services always passive. However, in sharp contrast to the balance of pay­ments development in Germany, Japan's current account surplus soared during the early 1990s to record highs (1992: 117 billion US dollar or 3 percent of the Japanese GOP).

IProfessor of Economics, Institute for Economic Policy, University of Cologne.

2Assistant-Professor of Economics, Institute for Economic Policy, University of Cologne.

36

Fig. 1: Germany's Balance of Payments

150

100

50

o

-100

-150

BiliionDM

.. -------------------------

e' ••

•

1970 ,1972 1974 1976 1976 1980 1962 1984 1986 1986 1990 1992

Year - Ba/anoe on capital BCOOI.I1I • Ba/anoe on current acoount BlChange In net foreign reserws

Source: Deutsche BundeobMk

Japan, Germany and a few smaller European states (Belgium, the Netherlands, Switzerland) belong to a group of countries which have experienced current account surpluses and net capital exports for a number of years_ These countries have provided capital for the rest of the world, mostly absorbed by a handful of industrialized countries like the United States, the United Kingdom, Spain, France, Italy, Canada and Australia_ These "capital absorbing" countries have experienced large and persistent current account deficits, at least since the middle of the 1980s_ As a result, capital has been predominantly flowing between industrializtid countries, whereas capital-poor developing countries have attracted only limited amounts of total world capital_

The political events of 1989, especially the collapse of the communist regime in the former German Democratic Republic and the reunification of the two Germanies, have resulted in major repercussions for Germany's balance of payments_ In 1990 net capital exports (including "Net errors and Omissions") declined considerably from 127 billion D-Mark (1989) to 65 billion D-Mark, and in 1991 Germany became a net capital importer, importing 22 billion D-Mark of capital (net), which represented a shift in the capital account of nearly 100 billion D-Mark within a single year_ In the current account, corresponding changes have taken place_ The current account surplus, which amounted to 108 billion D-Mark

37

in 1989, declined to 76 billion in 1990, and in 1991 Germany experienced its first current account deficit in ten years (32 billion D-Mark). The current account deficit persists to the present, amounting to about 1.3 percent of GDP and it is expected that the fundamental balance of payments position of Germany will not change in the years to come.

2 Economic Causes for the Shift in the Capital Balance

It was not pure coincidence that shortly after the reunification, Germany expe­rienced the first current account deficit in ten years . The rapid shift from a net capital exporter to a net capital importer can be explained by the costs of German economic unification. West Germany had to cushion the impact of the East German economy's collapse. The economic integration of East and West Germany can be interpreted as a far-reaching economic shock for the East German economy. On July 1, 1990 the D-Mark was introduced in the east, with a considerable portion of East German marks having been exchanged one-to-one into D-Mark. Savings were exchanged at a lower conversion rate. Naturally, this enhanced the purchasing power of East German consumers. It has often been asserted that the conversion of East German money and savings induced a "spending spree" in East Germany, causing the current account to shift to a deficit. However, such behaviour of East German consumers was observable only for a few months. Saving rates fell only in the third quarter of 1990. Afterwards, they rose again to "normal" levels (around 13 percent).3 The East Germans apparently did not plunder their savings on a large scale to finance their con­sumption.

Therefore, the drastic changes in Germany's balance of payments have to be explained differently. When the D-Mark was introduced in the East, not only were stocks converted, but also flows. The most important flows which were converted one-to-one were wage payments in Eastern Germany. This meant an enormous cost push for East German enterprises. Goods which might have been competitive at the split exchange rate used by the German Democratic Republic (averaging 4.6 East German marks for the D-Mark) were driven from the markets. The inefficiency of state-run enterprises in the centrally planned economy of Eastern Germany suddenly became apparent, forcing many firms to a speedy death. And those which survived, experienced another shock in the first round of wage bargaining, which led to enormous wage increases of ap­proximately 6S percent between April 1990 and April 1991.4 Consequently,

3Ger1inde Sinn & Hans-Werner Sinn, Koltstart. Vo1Jcswirtschaftliche Aspelae deT deutschen Vereinigung, TUbingen 1991, p. 65. An English version was published in 1993 by MIT Press, Cambridge, MA, under the title Jumpstart. The Economic Uniftcation of Gennany.

4Cf. Sachverstllndigenrat 1991192, paragraph 60.

38

production declined dramatically and unemployment (open and hidden) skyrocke­ted. Under these circumstances, it was hardly surprising that the overly optimistic expectations of a speedy transformation of the East German economy did not materialize. The only possibility of preventing a serious economic and political crisis was in a policy of channeling high transfers from the West to the East. As the Council of Economic Advisers wrote, these transfers "helped households in the East to weather the adjustment without reductions in their consumption levels. ,,5

Table 1: East Germany: Income, Expenditure and Transfers (in billion DM)

GNP Overall Private Exports Transfers Transfers Deficit Demand Consump. -J. Im- (gross) (net) of the

ports Treu-hand-anstalt

1990 238 295 175 - 48 46,2

1991 195 359 186 - 163 172 125 20

1992 245 431 212 - 198 234 150 30

1993 286 488 232 - 212 248 148 38 Source: Sachverstiindi enrat, Dl W g

Gross public transfers to East Germany rose from 172 billion D-Mark (1991) to 248 billion D-Mark (1993). If tax and social service contributions from East Germany are subtracted, the net amount varied between 125 billion D-Mark in 1991 and 148 billion in 1993,6 which amounted to roughly 5 percent of the West German GDP. Given the high unemployment in East Germany, most of the tran­fers represent unemployment, social security and health insurance benefits, thus implying that three-quarters of the transfer flows are spent on consumption. On the whole, income earned in East Germany covers only half of private and public spending. Every second D-Mark, which is spent by East Germans (persons and institutions), comes from the West. For an economy as a whole, this is a unique situation. It will be sustainable only as long as West Germans are willing and able to fill the income/production gap with further transfer payments.

Obviously, the huge transfers are a severe burden on West Germany's public finances. German reunification caught political decision makers off guard. Initiately, the German government tended to believe, that given healthy growth

SSachverstiindigenrat 1991192, paragraph 88.

6Sachverstiindigenrat, var. issues.

39

in the West, the expected burdens from reunification could easily be handled. However, the transfers turned out to be larger than expected and in 1992 the West German economy was hit by a severe recession, and thus, tax receipts fell and unemployment benefits rose sharply. The federal government, the states and the municipalities were all forced to implement spending cuts. In addition, the tax on gasoline was rais~, a surcharge on income tax was levied and social insuran­ce contributions were raised. Despite these spending cuts and tax increases the public deficit ran out of control. But, it is questionable whether German politici­ans were truely serious about fighting the deficit, seeing as the Bundestag passed new measures introducing a collective insurance system benefitting elderly people in need of intensive care. Therefore, the public deficit increased considerably. Including the accounts of the Treuhandanstalt, the agency in charge of selling off state-owned East German enterprises, the public postal service and the state-run railways, the public deficit rose from 135 billion D-Mark in 1991 to 230 billion D-Mark in 1993, which in the latter approximately equaled 7.5 percent of the German GDP. The total public debt (including the shadow budgets) in December 1993 amounted to 1.8 trillion D-Marks, thereby approaching the notorious margin of sixty percent in the Treaty of Maastricht, which is the precondition for membership in a future European Monetary Union.

Table 2: Germany's Public Debt

GNP Public P.D. incl. Debt ** in % of Shadow Bud- in % of GNP

GNP gets*** [bn DM] [bn DM] [bn DM]

1985 1844 760 41 846 46

1986 1945 801 41 894 46

1987 2018 849 42 951 47

1988 2122 903 43 1009 48

1989 2249 929 41 1039 46

1990 2448 1053 43 1195 49

1991 * 2849 1174 41 1332 47

1992 * 3044 1345 44 1597 52

1993 * 3106 1508 49 1838 59 Source: Deutsche Bundesbank DIW own calculations * Including East Germany ** Federal Government, States (l1inder), Municipalities, the Fund "German Unity" and other Funds ***Treuhandanstalt, Public Railways, Public Postal Service

40

The decision to finance the huge transfer payments for East Gennany by increasing the public debt considerably raised the demand for capital. For years, savings had been higher than capital demand in Germany. This had changed within months after Gennan unification. Public capital demand has been rising without investment demand falling dramatically. Therefore, Gennany has become dependent on foreign capital to fill the gap between desired spending and income. This is the main reason for the sharp shift in the Gennan balance of payments. The increased capital demand led to net capital imports which caused a deficit on current account (plus changes in net foreign reserves).7

3 Germany as a Capital Importer

3.1 Rising Foreign Debt and the State of Public Finances

The need to finance the huge eosts of Gennan economic unification has made Gennany dependend on foreign capital inflows. So far, it has been no problem to attract sufficient amounts of foreign capital. The role of the D-Mark as an. important international reserve currency as well as strong preferences of foreign investors for Gennan bonds have led to huge capital inflows which even surpas­sed the current account deficit. Correspondingly, foreign reserves of the Bundes­bank rose, especially in 1992, when speculative funds were flowing into Gennany in large quantities. A huge portion of the capital inflows were used to buy Gennan government bonds. This was highly beneficial for the Gennan treasury, which could finance most of its deficits with foreign capital. Astonishingly enough, this was possible at declining interest rates-at least until the end of 1993. In the first half of 1994 interest rates increased slightly.

Despite of the ease with which the budget deficit has been financed, in the medium or long run a serious problem might arise: Gennany's credit ratings. So far, the country has an excellent rating in the markets. But if investors think that they have reason to believe that Gennany's international competitiveness is declining, I they will start to repatriate their capital. This would lead to a sharp increase of interest rates. It would become more difficult and more expensive to attract new foreign capital. Such a scenario may seem unlikely today, but if a

7Barbara Dluhosch, Andreas Freytag & Malte KrUger, "Leistungsbilanzsa1den unci internationale w~." Untersuchungen zur Winschaftspolitik 89, Institut fUr Wirtschaftspolitik, Cologne 1992, p. 199. (A revised edition will be published by Edward Elgar Publishing Ltd., London, under the tide International Competitiveness and the Ba/Qnce of Payments: Do Current Account Deftcits and Surpluses Matter?

ICf• RUdiger Dornbusch, "The End of the German Miracle,' Journal of Economic literature, vol. 31, pp. 881-885.

41

successful restructuring of the East Gennan economy is not achieved in the near future, it may become reality.

This demonstrates the strategic importance of the development of the overall public budget in Gennany. The deficit has to be brought under control by reducing the expansion of public expenditures. This policy has not been made easier by the severe recession 1992/93. But it will not be sufficient simply to reduce spending. In addition, public expenditures must be reallocated. The proportion spent on consumption is too high. This has negative effects for Gennany's growth prospects and the ability to service its rapidly rising debts.

Such budgetary measures have to be reinforced by attempts to strengthen the locational competitiveness of the Federal Republic. Gennany's preoccupation with its economic reunification should not lead to a negelect of developments in other countries, which increased their competitiveness by lowering taxes and deregulating their economy. In East Asia as well as in Latin America, rapidly growing economies emerged which compete strongly on the world's goods and capital markets. 'From this point of view the problem of Gennan public policy is not the reduction of the current account deficit but the preservation of Gennany's credibility in the international capital markets, i.e. Gennany must remain an attractive country for foreign investors.

3.2 Effects of Germany's Reunification on International Interest Rates

Gennany and especially the Bundesbank have been criticized for their impact on world capital markets. It is claimed, that the Bundesbank kept short-tenD interest rates too high for purely domestic reasons without taking into account the international repercussions of such a policy. This supposedly forced other central banks to keep their interest rates undue1y high as well, thererby increasing the overall level of world interest rates. However, the critics of the Bundesbank overestimate its power to steer long-tenn interest rates. The latter can be in­fluenced-at best-only indirectly by the Bundesbank. The main reason for the relatively high interest rates was not Bundesbank policy but the hugh public deficit. Instead of providing capital for the rest of the world, which was the rule before Gennan reunification, Gennany now is a net importer of capital. In the 1980's Gennany exported 550 billion DM of capital (net). This amounts to one third of Gennan savings. This capital supply for other countries is now missing on the international capital markets. In other words, the rest of the world, is facing diminishing capital supplies. Germany can hardly be criticized for this. The international capital markets are competitive markets, where those receive money who are judged to be the best investments. Gennany competes for capital with other industrialized countries, with the developing world and with the eastern transfonnation states. It would not be appropriate to restrict this competi­tion on ethical or distributional grounds. This would not only damage Gennany, it would also delay Gennany's reappearance as a capital-exporting country, thus

42

also harming other economies. In this context it should also be remembered that Germany as well as Japan, have been criticised already for exactly the opposite reasons: their large current account surpluses, which supposedly were "a burden" for the deficit countries.

3.3 Aiding Europe's Emerging Market Economies

Germany is supposed to provide financial assistance to the emerging market economies in Middle and Eastern Europe, including Russia. Just like East Germany, these countries have to be modernized, a new infrastructure built and the environment cleaned up. Assistance can take the form of public transfers or of opening up of markets. Given the huge transfers channelled to East Germany,

Fig . 2: Germany's Trade and Transfer Balance with Eastern Europe

20 l 15

10

a

oS

·10 l ·15 L L--

ll1e1S 1967 1ge8 1\I8Q 1990 lQQl lQQ2

t:ll BeIenoeolT'-wlh Easlam Europa .PrMI!eTrMsi .... (naI) L Pubioc TrMst"", (naI)

• Nat Shott TarmCapdaJMowmen1s +Nat Long Term Capd81 t.IoIIernen1s

Source: Deutsche Bundelbank

it is not surprising that German financial assistance has been small so far. Although in the 1990s the level of transfers to Eastern European countries is much higher than it used to be before 1989, in absolute terms transfers are still

43

small-never exeeding 5 billion D-Mark per year. Private capital flows have not been much bigger. In 1990 they were exceptionally high, amounting to 20 billion D-Mark, but they fell to under 8 billion D-Mark in 1991 and 1992.

One important factor which is slowing down growth in the Eastern European countries and reducing the amount of profitable investment opportunities is the restricted access of eastern products to western markets. It is difficult to justify the slow-paced opening of markets for the former CMEA-countries. Trade policy, however, is one of the responsibilities of the European Union, which has signed trade agreements with Poland, the Slovak Republic, the Czech Republic and Hungary. Notwithstanding these treaties, access to the EU-market is severely restricted for so-called "sensitive" products (steel, coal, textiles, agricultural products). But these are the very goods, in which the emerging market economies can be expected to enjoy a comparative advantage. The European Union lacks an eastern policy, which adequately takes new political conditions into account.

44

List of References

Deutsche Bundesbank, Monatsberichte der Deutschen Bundesbank, various issues. Deutsches Institut fUr Wirtschaftsforschung (DIW): DlW Wochenberichte, various

issues. Dluhosch, Barbara, Andreas Freytag and MaIte .KrUger, "Leistungsbilanzsalden

und intemationale Wettbewerbsfahigkeit." Untersuchungen zur Wirt­schaftspolitik 89, Institut fUr Wirtschaftspolitik, Cologne 1992. (A revised version will be published by Edward Elgar Publishing Ltd., London under the title International Competitivenness and the Balance of Payments: Do Current Account Deficits and Surpluses Matter?)

Dornbusch, Rudiger, "The End of the Gennan Miracle," Journal of Economic Literature, Vol. 31, (1993), pp. 881-885.

Sachverstiindigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung (Council of Economic Advisers), Jahresgutachten, various issues.

Sinn, Gerlinde and Hans-Werner Sinn, Kallstart. Volkswirtschaftliche Aspekte der deutschen Vereinigung, Tubingen 1991. (An English version was publis­hed in 1993 by MIT Press, Cambridge, MA, under the title Jumpstart. The Economic Unification of Germany.)

The Japanese Labor Market Today

Kazuaki Tezuka i

I Introduction: Recession and Employment Adjustment

Since mid-1991 the Japanese economy has been in the grips of a serious reces­sion. One result is that the number of open jobs in comparison to the number of job-seekers has declined steeply. In July 1993 it amounted to 72 % of the number of unemployed (1,590,000). Also, the regional differences have become very great; in Hokkaido this rate was 40%, in Okinawa 41 % and in Aomori 45%. This means that the number of open jobs had declined in peripheral regions.

The recession forced the large enterprises in Japan to massive lay-offs (contract cancellations and early retirements). At Toshiba 5,000 employees were affected, at NIT 10,000, at Nippon Steel Co. some 4,000, and at Kawasaki Steel 3,000. At the last named some 15,000 employees (30% of the total) had already been transferred to subsidiary companies or branch works.

A survey by the Labor Ministry in six branches-including the steel and automobile industries-showed that by the end of August 1993 60% of the firms had already made adjustments in the personnel field. These included:

transferals within the company, 24.2%; transfer3.Is to branches, 13.2%; short time, 8.3% and contract cancellation and firing, 3.1 %.

The numbers of those affected were particularly high in the steel industry (88.6%), in high-precision engineering (78.0%) and in the automotive industry (76.2%). Lay-offs in the automotive industry were the highest (5.9%), whereas short time work is prefered in the textile industry (24.0%).

According to a survey by the Japan Productivity Center, unemployment was a serious problem not only for workers in the productive fields, but also for general employees. In all companies the excess of employees in the middle and upper age groups is so high that actual unemployment in the firms has exceeded one million. While the rate of unemployment in Japan seems at first quite low at

iProfessor of Economics, Chiba University

46

2.5%, the real rate is estimated to be more than 6%, since hidden unemployment is common and there are still problems in gathering statistics. For example, according to statistics, the number of short time workers is 3.95 million. Es­timates, however, assume that five million is more realistic.

Another remarkable effect of the recession may be found in the reduction or the complete relinquishment of overtime. This is especially so for wholesale trade, which in February-April 1993 registered a decline of about 30% from 1990. Mainly due to the reduction of overtime, the annual working time in 1992 fell below 2,000 hours. In two or three years this wiIl probably drop to less than 1,950 hours. At this point I should like to emphasize three things: 1- The restructuring of Japanese business. In many industrial branches production sites are being shifted abroad or, in a few branches, it is being attempted to shift production to other products. In general, this is having a negative effect on the labor market. 2- The change in the system of "life-long employment," especially on the Japanese labor market. A current investigation shows that the increase in job switching by the younger generation and the difficulty in giving life-long employment guarantees to persons in the middle and older age groups is eroding this system. 3- The immigration of foreign laborers The immigration of a foreign labor force has also become a problem for Japan, though not to the extent of that in Germany. These points wiIl form the central concern of this paper, though if possible I will also discuss some other problems as well, e.g. trends in working time, employ­ment of women and older persons.

2 Change and Restructuring of the Japanese Labor Market

The major task facing Japan since 1990, due to the appreciation of the yen, the recession and trade policy frictions~specially with the USA and the EU-, is the restructuring of its economy. One of the basic problems concerns the trans­ference of production abroad. Especially in the branches of electrical appliances and automobiles, production sites abroad have become indispensable, just as was the case for Germany. This development has had serious effects on subsidiary firms for SMEs (small and medium sized enterprises). In concrete terms the ratio of production abroad by representative Japanese firms grew rapidly in 1992, especially due to the strong yen and wage increases at home: Toyota 19%, Nissan 15.9%, Matsushita 14%, Toshiba 15.3% and Sony 20.0%.

An increase of this dimension in the share of production abroad must have a negative effect on subsidiary firms. In the past two years SMEs have invested more strongly abroad than have the large enterprises. It seems to me that this in particular is due to the yen revaluation. In the three years, 1986-1988, in which the yen was drastically revalued, the number of SMEs investing more than ten

47

million yen abroad was 3,287. Over the next four years, 1989-1992, 3,588 com­panies invested more than 30 million yen abroad. It is especially interesting to observe that the main focus of investments in Asia shifted from the NIE-countries to ASEAN and China. Of those businesses investing abroad, 40.4 % also invested in China in 1992.2 According to the same source, 52.8% of the exports of Japanese daughter firms or joint-ventures abroad in December 1992 went back to Japan.

At this point, we ought to note that Japan was able to mitigate the effects of the yen revaluation through its investments abroad-especially in China. Even in the case of domestic production, production sites were shifted from central areas such as Tokyo to peripheral areas, e.g. both Nissan as well as Toyota have build major works on the island of Kyushu. The Nissan factory at Zama, in the 1970s one of the most modern and productive automobile factories in the world, was closed down. This is also a part of this development.

Let us examine another case of restructuring. The largest steel enterprise, Nippon Steel Co., has invested more than 100 billion yen in modem works since 1985, but at present they are only working to 60% of capacity. The reason for this is the lull in the automobile business. On the other hand, the reason also lies in the inefficient productive structure, the same products being produced in ten different factories scattered allover Japan.

Integrating factories like these and concentrating them at a number of sites are urgent tasks in the present economic crisis. In this, it is vitally important to transform economically weak branches into profitable ones. Profits range from 8 % in the engineering branch to 4 % in steel production. But many other branches-e.g. ceramics, chemicals, non-ferrous metals, computer systems-are at present running a loss. Restructuring within the enterprises is unavoidable, because the loss. situation is frequently a result of an all too thoughtless diversifi­cation.

3 New Aspects in Japan's Employment Patterns

The changes in, the so-called life-long employment or in the seruonty rule patterns have come under public discussion recently, reflecting· the concern about the employment situation. In an opinion poll carried through for the office of the prime minister in 1992 on work attitudes, the question was asked what kind of working career the employees wanted. The answers showed that 52.4% of the respondents desired a life-long employment with an enterprise, either in the administration or as an expert. Those who moved into an administrative or managerial position or wanted to absolve a specialist education after a switch of jobs made out 28.5%. A similar tendency was registered with women. In

2Whilebookfor Small and Medium Sized Enterprise, 1992.

48

comparison to a poll carried out in 1982, the number wanting to work in an enterprise (either in the administration or as a skilled worker) sank by 3.9%. However, among those who wanted to start a professional career following a job switch, this number had risen to 9.2%. Reality has made it difficult to work life­long for one enterprise.

In the main, this tendency has resulted in three changes. Firstly, we have become aware of problems in professional life which are characterized by catchwords such as kaishaninngen, i.e. people who only take the affairs of their firm seriously and can only fulfill themselves there, or c/wjikanroudou, i.e. extremely long working hours with lots of overtime. A change in the climate of opinion was shown by the answers to the question: "How do yon decide if the demands of the company contradict family affairs?" which had been asked in a poll by the Keidanren. Although the answer in the present situation was 81.8% in favor of the firm, in the future we may expect that 50% will be undecided and only 20% will continue to answer fully in favor of their firm, i.e. for 70% the preference for their firm is just a plain necessity. And as to long working hours, the opinion has gained currency that length and distribution of work ought to be exactly and clearly regulated and that overtime should be avoided if possible.

Secondly, personnel decisions in only 3.6 % of the enterprises were still based on the seniority priciple, whereas 41.0% emphasized performance and 30.6% employed both criteria.' In calculating wage levels 67.5% of the firms take into account the abilities of each worker as well as factors such as age and seniority. 4

ThinIly, up until now life-long employment for male employees had been the rule in large enterprises with more than 500 staff. However, the proportion of male life-long employees out of the entire employed in these enterprises (go­vernment and local bureaucracies and firms with more than 500 employees) declined from 23.4% in 1985 to 21.6% in 1991. Further, even these "permanent" employees· now tend to switch companies. This is especially so with young employees.

The increase in female employment is another sign of the change in life-long employment patterns. Formerly, Japan was, along with Germany, the country with a low rate of female employment. Today, the advancement of women in all fields is a clear sign. The employment rate for Japanese women now stands at 51 %. This· is a dynamic development, when we take into account the higher educational level of women. The proportion of qualified women amounts to 28.8% of all working women (totaling 26.98 million).

The number of women increased not only in office jobs, but also among skilled workers (24.5%), in commerce (13.2%), in specialty fields and in technology (12.3%). Even in government administration there was an increase of 20% over the last five years.

'Ministry of Labor, Investigalion on Personnel Administration, 1990.

~ofLabor, 1992.

49

Women are increasingly interested in steady work and remaining longer with a firm. Compared to 1990, the ratio of women dropping out of work before retirement declined by 0.4%. Also, the rate of women switching to a new profession declined by 0.4% over the same period.' These results show that employment relationships of men and women are gradually converging, and that differences are not as great as previously. I will risk the conclusion that life-long employment patterns are a thing of the past.

4 Foreign Workers in Japan

It is only in the last four or five years that the problem of foreign workers has really begun to be discussed in Japan. It was the time when, on the one hand, it became difficult for workers from Asian countries to work in the Middle East and the United States and Australia also altered their immigration regulations. On the other hand, due to the prosperous business climate and the strong yen, the number of foreign workers grew.

But first, I should like to point out three important differences between Germany and Japan: Firstly, there is no comparison between the mass of workers from Japan's neighbors wanting to enter Japan and the German situation. It has been surmised that due to the constitutive changes in Eastern Europe, e.g. the new emigration and immigration laws in Russia, some five million persons will migrate to the West. In China as the center of East Asia and in India as the center of South Asia there are de facto several hundred million unemployed. If the Japanese regulations and the international situation-i.e. the political and economic situation in various nations-do not change, and if in addition a migration route can be established, then Japan must reckon with die immigration of some one to two hundred million persons.

A number that cannot be kept under control. Across the U.S. -Mexican border, which is only a step wide, some million persons per year emigrate to the USA on an average since 1970. The per capita income differential between the USA and Mexico is only 7:1; this figure is 50:1 for Japan and China, 30:1 for Japan and the Philippines and 100:1 for Japan and Bangladesh. Secondly, the demand has risen in the business world (from so-called humanists) to limit the duration of stay and the number admitted of these masses of people.

This should make clear that a realization of this system will be difficult. Thirdly, the most important aspect of this problem: Unfortunately, many Japanese fully intend to exploit the foreign workers as cheap labor under bad working conditions and to use them to perform jobs that no one else will do. It is their opinion that the foreign workers should be shipped home when a reces­sion begins. However, the young people from Asia have a relatively high

'Ministry of Labor, Investigation of Employment Trends, 1992.

50

educational level and are not satisfied with the jobs assigned them. Also, they know that they must do the same job as their Japanese colleagues-only under worse conditions.

In the Federal Republic of Germany, foreign workers were also mainly hired to do dirty jobs as unskilled workers. But in the type and status of work, they worked under the same conditions and earned the same wages as their German colleagues. Also, most of these workers came from those European regions which were largely agricultural and where a population surplus existed. Therefore, they cannot be compared to the young people now coming to Japan.

But these are also not going to accept such treatment from the Japanese, i.e. from other Asians. This statement is based on interviews of workers returning home from Japan. The USA is a nation of immigrants, in which each had the equal right of "the pursuit of happiness." In Japan the same credo cannot be found in everyone. Japan must make the effort to view the foreign workers not just as manpower and allow them to enter Japan just under these conditions. Instead tliey should be part of a program of technical exchange aiming at the economic development of their home countries.

Some of the people who do not understand the extent of this connection often think that Japan should admit foreign workers only under certain controls. But the results would be as follows: Provided the controls were a success, Japanese products would become less expensive and competitiveness would suddenly rise. This would then lead again to frictions on the trade markets and to a renewed rise in the value of the yen.

On the other hand, there would also be no improvement in the situation of the Japanese worker. Working conditions for the now growing mass of "older" workers would deteriorate. It would also do nothing to eliminate the status distinctions between large enterprise and SMEs. Subsidiaries would be forced to produce ever more cheaply for the large enterprises, allowing the latter to enhance their international competitveness. In short, it would be a vicious circle.

The employers may be divided into four different groups. The first comprises branches with an international image, such as banks or stock companies. They need workers who live in the neighborhood of Tokyo and have no problems with working conditions, professional qualifications or residency permits.

The second group is formed by employers who hired foreign workers under the same conditions as Japanese workers. They want to train workers to perform their tasks well and keep them as long as possible with the company. Only one in ten employers is like this in Japan. In the final analysis, foreign workers are more expensive than Japanese workers. While they receive the same wages as Japanese workers, the employer must provide them with additional benefits, such as food and lodging. A serious shortage of skilled labor forces employers to these measures.

The third group consists of employers who cannot get Japanese workers for the type of jobs they have, and who need cheap manpower. This group was able to increase profits in the last business boom and that without getting its hands dirty.

51

Working conditions are bad and rationalization and modernization measures are not realized. In a recession it is the foreign workers who are fIrst fIred. Most foreign workers are not even directly employed by these fIrms, their labor is rented from a private employment agency. When the employer pays around 11,500 per hour, the worker gets only some 1800. In Gunma there are some 70 such employment agencies, in Saitama we can assume the same number. Responsibility for these agencies lies with the authorities.

Many Brazilians of Japanese descent were victimized by such agencies. The third group of employers mentioned above have little interest in overcoming their labor shortage by creating jobs for women or older workers, but just want to make profIts as quickly and as effectively as possible. Neither the visa status nor the valid work norms, nor the work regulations are complied with. Eighty percent of the foreigners working for the third group of employers receive no night payor overtime; 70% are not covered by workmen's compensation insurance. Of course, hardly any receive a bonus.

As an expert on labor legislation and labor market research I presuppose that the employers at least protect "human rights" as the epitome of labor legislation. Equal and objective working conditions must be guaranteed at home and abroad. And I should like to emphasize at this point that this is often forgotten in Japan. When unions, chambers of industry and commerce, professional and business associations ignore this aspect, then it must come to a breakdown of a just, objective and social market economy.

Germany's Contribution to the Development of Labor Markets in Eastern Europe

1 European Characteristics

1.1 The Collapse of the Eastern Bloc

Ever since the end of the Second World War the boundary between the two power blocs ran through the middle of Europe. Western Europe stood under American influence, Eastern Europe under Soviet. The pursuit of independence and national interests was confined by narrow limits, in the West as well as in the East. Both sides grew accustomed to this situation which seemed to be the permanent order of things. Thus, the whole world was surprised by the rapid dissolution of the Soviet Union which began in the mid-80s and the implosion in 1989. Even more remarkable was the fact that the collapse of the Soviet empire proceeded almost without any violence. There is something to the thesis that in the final run the socialist regimes had ruined themselves and could not face the competition of the free world-especially under the decisive American leadership of President Reagan-for any length of time. In some countries prior to the collapse, oppositjonal groups ("civil liberties movements") had formed which exploited their newly won political leeway, though there is a tendency to exaggerate their influence on the overthrow of the old system.

Since the collapse of the Eastern Bloc all the countries in Eastern Europe find them~lves cau~t up in a process of transformation, in a stage of changeover from a socialist regime with central controls to a liberal system with market econ­omy controls. In one country, the former German Democratic Republic (GDR), the conditions for the transformation process are unusually favorable, since there was no need to strike out on its own like the other states in Eastern Europe, but could merge with the already existing Federal Republic of Germany and integrate into the economy of a highly developed state. The problems arising therefrom are more like the problems of an underdeveloped region within a developed state and are in part quite different from the problems of the now independent countries, so

lProfessor of Economics, UniversitylPolytechnic of Siegen.

54

that in the following analysis we will skip the special case of eastern Gennany. In the transfonnation from socialist regimes to liberal democracies there are

two main processes which may be observed, though border lines are never sharp and accentuations differ. One process is characterized by the overthrow of the ruling communist class and its replacement by Western-style democracies. This type of power shift is frequently referred to as shock-therapy and generally result­ed from free elections in the individual countries following the breakdown of the Eastern Bloc. Among the nations choosing this path are especially Poland, the Czech Republic, Hungary, Slovenia, the Baltic states and, with certain reser­vations, the Russian Confederation (Russia). The alternative process entails a retention of power-rejecting free elections-by the old power elite (known as nomenklatura), which, however, declares its abandonment of previously employed central controls and its engagement in market economy refonns. This process, known as gradualism, has been embraced by most of the successor states to the fonner S~>viet Union (CIS) and some other states in middle Eastern Europe (e.g. rump-Yugoslavia and Bulgaria).

1.2 Important Consequences of the Collapse of the Eastern Bloc

The collapse of the Soviet regimes has had grave economic consequences for all countries affected. Industrial production and foreign trade have without exception declined, in most countries by double-digit percentages in annual comparison. Unemployment sky-rocketed, as did the officially frozen inflation, which now became overt and accelerated even faster. Hyperinflation, a phenomena of both post-World War eras, which was thought to have been finally overcome, now characterizes many countries of the fonner Eastern Bloc.

However, there are remarkable differences in individual cases from these general appearences. Each country has developed very individually following the start of the transfonnation process: Those countries which had opted for basic change---shock therapy-were the first able to stop their economic nose dive and show recovery in some sectors. Thus, in Poland, the Czech Republic, Hungary and Slovenia industrial production as well as foreign trade-especially with coun­tries outside the fonner Eastern Bloc-have started to grow again. Only the unemployment rate, which fonns one of the late indicators of the business cycle, remains at a high, usually double-digit level. On the other hand, the decline continues unchanged in countries which opted for gradualism. These countries comprise in particular Russia and White Russia among the successor states to the fonner Soviet Union, and the fonner satellite states of Bulgaria, Roumania, Albania, rump-Yugoslavia, as well as Croatia and Slovakia.

2 Characteristics of Manpower Employment in Socialist Regimes

2.1 Linking Manpower to the Company

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In order to gather criteria for the development of labor markets in Eastern Europe it seems the most practical method would be to characterize manpower employ­ment in the socialist systems in more detail and to compare this with the procedu­re used in market economies. One major characteristic of the socialist regime is a general tie of manpower to the company, which is usually state-run. Since there are no profit calculations under a socialist regime, which would enable us to say something about competitiveness, and no bankruptcies, the employee enjoys job guarantee with his company. Even in cases of overt inefficiency no one loses his job, so that over a period of time a surplus of manpower is built up ("hidden unemployment"), which has to be eliminated to enforce efficiency when the system changes. A view that used to be current in the West that unemployment was unknown in socialist societies, is invalid due to this reason. Only in the form that unemployment took was there a difference between capitalist and socialist economies.

In market economic systems an employee frequently changes his place of work in the course of his working life. This is true with the economy seen as a whole, though there are exceptions. In most countries these include permanent employees in the civil service and certain large-scale enterprises. The frequency of working place change increases with the intensity of competitiveness so that not even large-scale enterprise can keep their staffs on a permanent basis. In Germany the present average tenure is seven years and declining. This is still much higher than in the United States, for example, where frequent job changes are traditional. In modern economies, open to world competition, frequent job changes being a part of normal life ought to have consequences for the educational system. A dynamic economy indicates a broad education based on a foundation of general knowledge and vocational preparation and which does not shift vocational training from the practical level in business and civil administration to an abstract level in schools and universities. Aside from the main track education there seems to be real need for a second track continued education during one's working life. For example, the tendency in Germany to concentrate on a very long academic main track education to the general detriment of further education later in life shows· a neglect of these needs.

2.2 Central Planning of Manpower Employment

A second characteristic of the socialist system is the centralized planning of manpower employment. This planning utilizes the instruments of overt directives or indirect controls through incentives. Since, as already mentioned, employees

56

of a company are generally tied to it and seldom change their jobs-excepting reorganizations of production-, the planning is concentrated on integrating school graduates and academics into the labor process. A process of selection begins early in the educational sector, in which individual wishes are recognized but do not playa decisive role. Decisive in the selection are the qualifications for specific professions and-increasing with the educational level-ideological reliability. Thus, students in the former GDR were among the most steadfast adherents to the communist party line, nor is it surprising that in the political revolutions in the communist bloc the "intelligentsia" not only did not playa major role but actually resisted any changes which would endanger their role as a privileged group. One basic characteristic of the socialist educational sy­stem--one which enjoys a certain tradition in Russia-is the strict orientation along the lines of vocational education, whose specialties are reflected in school and university organization. In this way, trained specialists are only able to perform specific activities, which the stable socialist economy in the rule guaran­tees them for the rest of their working life. The breakdown of the socialist system has thus, apart from other causes, left behind a host of unemployed, because most of them received a far too narrow education for almost every type of employment in a competitive economy and therefore are unemployable without extensive retraining.

Centralized planning is generally foreign to a system based on liberal democra­cy. The German experience has demonstrated how much importance is to be attatched to individual decisions. Even though there was no socialist type of centrally planned economy under Hitler's rule-which made the change-over in West Germany in 1948 to a market economy system far more easy--the longer the regime was in power the more manpower was pressed into a national labor service, a type of forced labor which left no room for individual freedom. In order to prevent this from reoccuring in the future, the constitution of the Federal Republic of Germany guarantees all German citizens the right of free choice in profession and work place. Exceptions are only permitted in case of equal public service--such as the military draft-ilDd loss of freedom (prison labor) as a result of due process of law. The experience of the Nazi dictatorship prompted the fathers of the German constitution to extend the safeguards against every form of forced labor even farther than the former German constitution, introduced after the First World War. What has been described here for the German case, is also valid mutatis mutandis for all democracies, regardless of whether the free choice in profession and work place is guaranteed in a constitution or not.

2.3 Unions as Instruments of Rule

Unions arose in the last century as coalitions of workers to'improve their situation on the labor market. A third characteristic of socialist regimes is that unions have a completely different function: They are a major instrument of communist rule,

57

with which the employee is controlled in all aspects of life, is moved to engage himself and-if the cadres think it necessary-can be subjected to repression. No employee can avoid being a member, thus the entire working population belongs to one union or another. Membership "dues" are really a form of taxes, over which the cadres have full disposal. A further indication of the function of the unions as an instrument of rule can be seen in that the chairman of the union federation is-just as is the head of the secret police--a member of the all­powerful executive committee of the politburo.

Despite the great changes which unions have experienced since their inception over a century ago and regardless of their major influence on politics and economy, they have remained private institutions in market economy systems, without official or state function. Their main task remains to be seen in the achievement of improved working conditions and higher wages for their members. In this sense they are apolitical, even though their views may be in harmony with earticular political parties and they have definite views on all sorts of problems. Membership is voluntary, even in those countries where unions try to make employment in a plant ~ upon membership in the union (closed­shop factory). In no country with a market economy system is the degree of organization (percentage of workers in unions) higher than 50%; in some important economies, i.e. the United States, it is even lower than 20% and still declining.

3 Labor Markets in the Transformation Process

3.1 Labor Markets as an Integral Component of the Economy

Labor markets form an integral component of the economy as a whole and only in theoretical considerations may they be treated as isolated markets. As experien­ce has shown in View of the interdependence of labor and other types of markets, i.e. for consumables, capital goods and finances, it is sensible to apply the same regulatory measures to the labor market which apply to the national economy as a whol,e. Otherwi~ permanent disturbances and structural distortions, i.e. wasting scarce resources, cannot be avoided. The tendency, even in market economy systems, to interfere through regulations in the labor market-usually with the intention of aiding the supposedly weaker employees-cannot however be over­looked.

The development of labor markets is a part of the transformation process and thus a primary task for each government which has to make the decisions on the type and extent of economic reorientation. The labor markets in Eastem Europe have been completely overrolled by the transformation process. The extent of the changeover to the requirements of a market economy system is proceeding according to the basic political decision as to whether the old power structure is to be gotten rid of ("shock-therapy") or a step-by-step adjustment is chosen. The

58

first results show----as noted supra-very clearly that the transformation seen everywhere from covert to overt unemployment proceeded fairly rapidly in Poland, the Czech Republic and Hungary and trolt the decline could be stopped. In the second group of nations which had opted for a gradual transformation, unemployment is at present continuing to rise. The Russian Confederation (Russia), the most important country in Eastern Europe, displays characteristics on the labor market of the latter group, but in other areas, i.e. in the privatization of state firms, can be counted as one of the former.

3.2 Imperiling the Transformation Process Through Labor Markets

The open unemplyment in Eastern Europe forms a social dynamite which is endangering the transformation process. Even if the economic consequences of hidden and open unemployment are the same-namely production loss as compared to efficient full employment-they are felt to be socially different. Having a job is still something else than unemployment, even if in both cases there is no contribution to prodUction. Social feeling is not disturbed by the fact that the hidden unemployed are living at the cost of others. Those at any rate are the social experiences which have been gained in Eastern Europe including the· fonner GDR. These experiences force the governments to make concessions which are problematic according to market economy principles.

The dilemma for those in responsible positions apparently consists of the fact that success as well as failure in labor market policy can hinder the transformation process. If a government should allow competition on the labor market, the social dynamite can become a danger for the government itself. The unemployed think that a return to the old system will guarantee them jobs which they lost in the transformation process. Or if the government should intervene to ease and prevent a further expansion of unemployment, then the economic success of the trans­formation process becomes questionable. Firstly, Eastern Europe must be counted among the poorer countries of the world which cannot afford a comprehensive social security system or, with a view toward their development goals, do not want it. Secondly, maintaining unprofitable jobs would at least slow down the transformation. In view of this dilemma, governments have little room for prag­matic action, without being certain that they have taken the correct political path.

3.3 Late Recovery for Labor Markets

For labor markets in the transformation process the same rule is valid as for completely developed market economy systems: they react with delay to improve­ments in the economy, which may be recognized in growing order books, increas­ed domestic production and expanding foreign trade (late indicator in the business cycle). Before companies start hiring new manpower, they will clear stockpiles,

59

go to full capacity and increase working time for staffs already on the payroll, especially if they don't reckon with a pennanent recovery and have difficulty firing excess manpower due to, for example, government intervention in the labor market. One of the tasks of the Eastern European governments will be teaching the public about the new conditions for the economy.

This necessity is especially acute in those countries which have opted for rapid change. For these countries have intentionally made no preparations to keep unprofitable firms from closing. Employees are more readily fired than in coun­tries which have chosen a more gradual procedure. Coupled to the initially high unemployment is the expectation that the crisis will be quickly overcome. This expectation is justified and should be fulfilled as the first years of the transfor­mation process indicate. However, the labor market is the last to affected by the positive developments, thus placing strong pressure on the patience of the unem­ployed who will react accordingly. No doubt the election of a new government in September 199~ in Poland was due to such factors. But contrary to expectations by the majortiy of voters and abroad, the new left government continued with the reform policy.

4 German Contributions to the Development of Labor Markets

4.1 Aid in the Erection of Industry-Wide Systems for Reducing Risb

The Federal Republic of Gennany bas a distinctive system of industry-wide public insurances which protect economically individuals against the vicissitudes of life. This system rests on four pylons: unemployment insurance, health insurance, ac­cident insurance and retirement insurance and bas a long tradition in Gennany. At the time of the introduction of the health, accident and retirement insurances over a hundred years ~go only workers whose means could not finance a private in­surance were covered. Fees are paid by employers and employees to equal halves, excepting only accident insurance which is financed exclusively by the employers. The state also subsidizes these insurances. Especially the scope of health, accident and relirement i~urances bas been steadily extended to include more and more of the population, so that by now the great majority of Gennany's inhabitants is an involuntary member in public insurances. All the same, other countries have adopted the Gennan system.

Even prior to political unification the social insurance system of the Federal Republic was extended on July 1, 1990--8t the same time as the introduction of the Deutsche Marlc-to cover the GDR. Since under the socialist system social security existed only within the firms, with the beginning of the transformation process in nearly all countries leading to the closing down of many firms, the demand arose to install an industry-wide public system of insurance. In view of Gennany's long experience with the system, experts from the Federal Republic of Germany were sent to many countries of the former Eastern Bloc. While no

60

country has adopted the complete Gennan systen in toto, which is anyway far too lavish for a developing country, many individual elements have been taken over. The effort is clear in Eastern Europe to establish social security systems corresponding to the labor markets, which would be independent of the fate of individual firms.

4.2 Aid in Setting Up Employment Offices and the System of Chambers

One of Gennany's special features on the labor market is the system of labor administration. By this term is understood a country-wide state network, employ­ing more than 100,000 civil servants who work in some two hundred local-level employment offices and sixteen state-level employment offices under the federal employment office. The main tasks of this government branch are finding posi­tions for job seekers-by law a state monopoly-job counseling, the promotion of vocational schooling, especially re-schooling and professional further educa­tion, as well as the payment of unemployment benefits. A second special feature having a more indirect influence on the labor markets is the system of professio­nal and commercial chambers (industrial and commercial chambers, trade chambers, agricultural chambers). The chambers are public self-administrating bodies with obligatory membership for all firms. Their main tasks are generally to promote the economic interests of their members. Within this framework they are also concerned with vocational schooling, by conducting examinations to establish professional qualifications and by offering courses in vocational schooling and professional further education.

Some countries in Eastern Europe have already started to set up labor administrations and trade chambers according to the Gennan example, while others are still at the conceptual stage. The main interest here is focused on finding jobs for the unemployed and on job counseling and its adjoined vocational re-schooling and further education. Experts from the Gennan labor administration are as a rule lent at no cost to the Eastern European nations within the context of technical cooperation programs for one or two years. Likewise, the Gennan trade chambers have concluded cooperation agreements with certain nations, e.g. 'several industrial and commercial chambers with the Baltic states, stipulating that experts be sent to aid in building up similar institutions at cost to the Gennan chambers. However, here labor market considerations do not stand uppermost, but helping new enterprises get a start in the market economy system.

4.3 Aid in Organizing Labor Market Parties

labor market parties, who negotiate for their members (employers and employe­es) over pay and side benefits, do not exist under socialist regimes, as mentioned supra. The so-called "unions" as an aspect of the power establishment disappeared

61

with the start of the transformation process, faded into the background or found new functions. Employers' federations had not existed even in name only, nor, in view of the state as the sole owner of production means, was there any need for them. Both types of labor market organizations had to be fresbly created.

In building up unions and employers' federations in Eastern Europe there has been some, though very limited assistance from Germany. Inasmuch as aid was provided, it came almost wholely-in contrast to the other aid mentioned-from private sources~ since unions and employers' federation are neither state institutions (like the employment offices) nor public bodies (like the trade chambers). The narrow bounds for assistance resulted from the fact that wage market parties, especially the unions, are institutions which place some value in their national identity and thus seek to avoid the impression that they are being controlled from abroad. In some countries-Poland comes first to mind-the unions and allied parties played a major role in doing away with the old order. Assis~ce from the German side, inasmuch as it was requested, was limited to questions of organizational efficiency. Apart from this, advice in international organizations played a cetItain role.

S Some Words of Caution

5.1 Questionable Role Models

Seen in the light of regulatory principles, there is reason to consider Germany's aid in building up Eastern Europe critically. The general reason for this critical estimation is the fact that in the Federal Republic of Germany nearly all the institutions which have been or will be transferred are themselves seriously flawed. This may be illustrated by a few examplary cases. The first example is re­tirement insurance which is supposed to guarantee an adequate existence at the close of professional life. If this original concept, which had been realized at the end of the last century, was still valid, then there would be no cause for any criticism. However, the present reality of retirement insurance is far removed from this original idea. Firstly, retirement insurance is being misused to support unemployed able to work by granting retirement benefits ten years before the legal retirement age of 65, in order to allow firms to reduce their surplus working force. Secondly, many groups in the population, who made little or no con­tribution toward retirement insurance, are accorded normal benefits. Thirdly, legal regulations .requiring sufficient capital reserves have been abrogated and-until quite recently-the gross income development taken as a calculation basis for retirement pensions, so that there was no stringent relationship between retirement pensions and economic performance and the former grew more rapidly than wages.

It would be similarly difficult to transfer exactly the German system of labor administration to the Eastern European nations. Since some time now there has

62

been considerable criticism directed at the placement monopoly which it enjoys and is found in no other country. Even if we accept that the finding of jobs for the unemployed is a public task, there is no reason in a democratic and liberal system for prohibiting private offices from doing so, even regardless of whether they do it to make a profit or as a public service. The present government has thus decided to follow the advice given years ago by a deregulation commission to do away with the monopoly. Whether it is able to do so in the face of the resistance by the opposition and by the gigantic labor administration bureaucracy remains to be seen. Among other tasks it is vocational counseling which meets objections on regulative grounds, because--as happened under the Hitler regi­me-it can easily be used to control professional choices.

S.2 Exporting Labor Martet Cartels?

An export of German labor market conditions to Eastern Europe would meet with grave doubts, because most ecqnomists take the view that the present situation of the German labor market has prevented a far-reaching recovery of the economy and would preclude a corresponding development in the economies of other countries. This is not just guesswork. An analysis of the economic difficulties in the former GDR leads to the conclusion that its integration since 1990 into the West German market has formed a serious hindrance to development and has even made a second "economic miracle, " with which many had originally reckoned, il­lusionary. It is certain that Germany's rapid reconstruction following the Second World War with a labor market like that which has developed in the last two decades is unimaginable. Thus, the deregulation commission mentioned above recommended the abolition of a number of regulations which have considerably reduced cOmpetition on the labor market. But the government is apparently afraid to follow these recommendations which could only be implimented over the objections of the unions and management, especially since it was just barely able to do away with the financing of strikers through revenue means a few years ago.

The main problem of the German labor market is not to be viewed in the existence per se of powerful unions and employer federations, but in that these private organizations are able to determine the economic fate of non-members. This violation of elementary principles of liberal democracy is only possible with state connivance: Unions and management, which on the union side have only been able to organize a minority of the workers, realized that their wage agree­ments could not diverge very much from competitive wages as long as competi­tion from outside was possible. Therefore they tried everything from parliamenta­ry lobbying to influencing the labor courts to eliminate this competition and were successful therein. In consequence it is possible in Germany that a few labor market functionaries can-following a practised tribalistic ritual-reach an agree­ment on wages that is not only valid for the minority in the national economy formed by their members but also for all workers in a branch, because the state

63

makes this private agreement binding for all. Or the state makes a private arran­gement legally binding that wages may always be higher than in the wage agree­ment, but never lower, even if that were the way to save an enterprise from bankruptcy. These examples of state intervention in labor markets, which could be lengthened, clearly show that a warning against copying German conditions abroad must be sounded. That the countries of Eastern Europe have for different reasons made only marginal use of the German labor market organization must in their interest meet with approval.

Remarks Concerning the Transfer of Managerial and Organizational Methods to Eastern Europe: Opportunities and Problems for Japan

Barno Oba l

1 Introduction

Proceeding from a Japanese viewpoint I should like to indicate two important considerations for promoting a transfer of managerial and organizational methods to Eastern Europe. In this paper we must examine, firstly, the conditions necessary for and, secondly, the conditions sufficient for such a transfer. Necessary conditions are the existence of a market economy system and the establishment of proper infrastructure; sufficient conditions are product quality and information technology.

2 Necessary Conditions

Eastern Europe must introduce a system of market economy suitable for a transference of managerial and organizational methods and establish a correspon­ding infrastructure. We tum first to the meaning of the market economy as an economic order and, following that, to the importance of setting up a correspon­ding infrastructure.

2.1 Introducin:g a Market Economy

As Hayek once wrote, it will be noticed that the optimum condition does not presuppose what economic theory calls perfect competition, but only that there are no obstacles to market access and that the market functions adequately in spreading information about opportunities. He explains it as follows: "It should also be specifically observed that this modest and achievable goal has never yet been fully achieved because at all times and everywhere governments have both restricted access to some occupations and tolerated persons and organizations

IProfcssor of Economic History, Tsukuba University.

66

detering others from entering occupations when this would have been to the advantage of the latter. But it will be achieved only if we leave the share in the total, which each member will get, to be determined by the market mechanism and all its accidents, because it is only through the market determination of incomes that each is led to do what this result requires. "2

2.1.1 The Case ofGerm.any

Following the Second World War Gennany re-introduced a market economy, establishing a Kartellamt (or Monopolies Commission) to exercise severe and stringent controls over cartels. After the currency reform of 1948 the government proclaimed the slogan of a social market economy to characterize economic policy. Accordingly, the market economy also had a social goal and consumer protection was granted high priority (tier Kunde ist Konig, the consumer is king).

The 'Monopolies Commission played a very important role in guarding the market economy. However, it, should also be noted that many economists contributed to the development of the Gennan market economy and a fair social order. 3

2.1.2 The Case of Japan

Japan also re-introduced a market economy following the Second World War, but did not establish a monopolies commission with such wide-ranging powers as in Gennany. This body, the Fair Trade Commission (FTC), is a very weak organization in comparison to the Gennan Kartellamt. This is but one of the dif­ferences between Japan and Gennany following the Second World War. In this sense Japan has a structural problem with its market economy and this is often referred to as the "Japan Problem. " Let us now turn to this for a brief considera­tion. Karel van Wolferen has pointed out a number of "confusing fictions" as being an aspect of the "Japan Problem. " He writes:

"First, there is the fiction that Japan is a sovereign state like any other, a state with central organs of government that can both recognize what is good for the country and bear ultimate responsibility of national decision-making. This is an illusion

2F. A. von Hayek. Studies in Philosophy, Politics and Economics. London 1967, p. 174. A paper submitted to the Tokyo meeting of the Mont Pelerin Society in September 1966 and published in n Politico, 1966.

3ee. the worb of Walter Eucken, Franz BOhm, Wilhelm ROpke, Alexander Riistow, Ludwig Erhard, Alfred Miiller-Annack. etc.

that is very difficult to dispel. ,,4

The second fiction, he continues, concerns the "free market": "The second of the central fictions that have determined Western attitudes since shortly after the Second World War is that Japan belongs in that loose category known as 'capitalist, free-market' economies .... The Japanese, Korean and Taiwanese experiences show that a third category of political economy can exist, beside the Western and communist types. US political scientist Chalmers Johnson has isolated this category of industri­al nations and labelled it 'capitalist development states' (CDSs). The strength of the CDS lies in its partnership between bureau­crats and industrialists; it is a variant that traditional political and economic theory has overlooked . .. S

67

There are some customs in Japan which are consistent with neither the system nor the principles of Western market economy. One of these is known as dango. Wolferen describes it thus:

"The truly symbiotic relationship between LDP (Liberal Democratic Party) politicians and the construction business is built on a system of rigged tenders. Reduced to its essentials, the system works as follows: for a construction firm to be allowed to bid on a public works project, it must first bribe a powerful politician. It will then meet with all the other nomi­nated contractors for a negotiating session, called 'dango,' at which it is decided which of them will get the job. The session is presided over by a local boss, called 'dangoya'; if the locality has no 'dangoya,' a major contractor will mediate. The dango system ensures that all participating contractors will get to work on a government project at one time or another. For large-scale public projects the politicians may receive more than one billion yen from a single firm. "6

Another custom which exemplifies the special character of Japan's market economy, known as Nippon Kabushiki Kaisha ("Japan Corporation"), is gyousei shidou or administrative guidance. Wolferen describes this custom as follows:

"As for business corporations, their relationship with the bureaucracy is not normally antagonistic, but in such instances of conflict as do occur-when the two parties differ on the

~e1 van Wolferen, The Enigma of Japanese Power, Tokyo 1990, p. 6.

Sop. cit., p. 7.

60p. cit., p. 154. Wolferen further wrote: "One of the most powerful LDP politicians of the late 1980s. Kanemaru Shin. played a major role in preserving and strengthening the dango system against measures planned by the Fair Trade Commission." P. ISS.

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details of policies-the companies nonnally have no option but to comply with bureaucratic wishes. In fact, the bureaucratic technique of 'administrative guidance' that has drawn so much attention from Western observers is itself a species of coercion by intimidation. ,,7

As Wolferen says, this is one of the keys to Japanese bureaucratic control. Although there is no legal obligation for a business to abide by the guidance, aU do so because they want to continue to function.

After the Second World War it was especially two ministries, namely the Ministry of Finance (MOp) and the Ministry of International Trade and Industry (MITI), which played leading roles in guiding the Japanese economy. It was not only the Economic Planning Agency but especially MITl that has been most closely identified with Japan's post-war "economic miracle." MITl has acquired a great amount of power to intluence trade and industry in Japan. For decades now it has had no difficulty in overruling the Fair Trade Commission (FTC), the official watchdog of the Anti-Monopoly Law.s Wolferen notes that the FTC is just about the only official JapanC?SC institution that has tried to hold out, for some time at least, against the system's informal practices and relationships that undermine the formal rules:

"Although it fails practically every time, it helps preserve the illusion that the formal rules are taken seriously. Very occasio­nally, though, the FTC gets the better of the economic bureau­crats. In one famous case in 1974, the Petroleum Association and executives from twelve oil firms were charged with having fixed prices during the oil crisis of the previous year. They claimed in defence that they had merely followed the instruc­tions of MITl. But this cut no ice with the Tokyo High Court, and the case was closed ten years later with fines and suspended prison sentences for the executives.,,9

In Eastern Europe the principle of competition did not exist in the Western

79p• cit., p. 450.

Bwolferen, op. cit., p. 300. "In theory the captains of industry adhere to classical free-market practices and do not welcome bureaucratic interference. Officially, again, the political preferences of the public are represented by the politicians it has elected to the Diet. According to this same official reality, there exist an anti-monopoly law and a Fair Trade Commission to prevent cartels, and a judiciary that guards democratic freedoms and individual rights. Labour unions ensure that worker grievances get Ii. fair bearing, and numerous other institutional safeguards protect the 'democratic free­market system' from its enemies. The absence of any independent judiciary, any labour uninns pri­marily representing the interests of workers and any effective safeguards against business-bureaucratic market-fixing conspiracies is obscured. Without the institutionalized divergence between formal and substantial reality. there would have been no post-war economic 'miracle.'"

9wolferen, op. cit., p. 164.

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sense. While prior to the collapse of the communist system there certainly was a form of competition, it exhausted itself in the award of medals to government­owned companies for exceeding the norms of government-set production targets. At present Eastern Europe needs to introduce a type of competition based on Western principles.

2.2 Establishing Infrastructure

Vincent Lobry states that it is an accepted fact that telecommunications infrastruc­ture plays an important role in the economic and general development of a nation. Telecommunications in the developed countries are now taken for granted and, to a large extent, operate in a free-market environment. In some countries deregula­tion and privatization are being pursued, allowing market forces to determine the telecommunica.tions environment. But in most developing countries telecommuni­cations still play the role of "agent of development":

"In some instances telecommunications services must be provi­ded ahead of real demand. In this situation government plays a vital role. The telecommunications infrastructure is a prerequisi­te for Information-Technology-led (IT -led) development just as traditional or basic infrastructure (power supply, water supply, roads, railways) was a prerequisite for industrial develop-ment. lI1o .

As he points out, telecommunications are an essential part of the infrastructure for overall national development. The resulting benefits which acrue today are mainly improved government administration, improved social services, law enforcement, health care and an enhanced commercial development. For these reasons go­vernmental policies that dictate the priorities given to the telecommunications sector will be prominent in IT-led development.

There is also a problem of insufficient IT infrastructure. Although IT requires less infrastructure than traditional technology does, some of its components are insufficient in many developing countries. Susumu Yamakage describes some of the shortcomings: (1) Unreliable electricity supply. Because an extremely stable power supply is crucial for both IT industry and IT products, an unreliable supply does not permit manufacturers to produce high-quality, internationally competitive goods. It also destroys programs and data, if not hardware itself. (2) Poor intracity networks. While long-distance or international telecommunica­tions are available or relatively easy to install, poor networks within the cities cause serious problems to users of IT. Outdated and/or ill-planned exchange systems in the major cities of the developing world have been a primary source

IOyincent Lobry, "Telecommunications Infrastructure," Tadeo Saito, ed.,lnfo17lllllion Technology-led Development, Tokyo 1990, p. 112.

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of disincentive for private business enhancement. The lack of reliable urban networks entails prohibitive costs for those who want to establish intra- as well as inter-company communications. (3) Lack of statistics. There is a lack of statistics and other data for public and private planning, thereby underutilizing the data processing function of IT products. Socio-economic statistics are either not collected or not released, hindering IT -led development and strategic decision-making by firms. Data related to development are lacking in particular. II

3 Sufficient Conditions

3.1 Quality

Quality is one of the most important factors of the sufficient conditions for economic modernization and managment transfer to Eastern Europe. Quality has, in its wider sense, many different meanings. They include human characteristics, qualifications and judgement, as well as technology in the field of human resources and products. As to our theme, we will discuss product quality in three aspects: industrial product quality, operational quality and design quality. Mizuno describes them thusly: 1- industrial product quality is defined as those qualities which characterize the product's fitness for use. It encompasses, therefore, those characteristics which the product must possess if it is to be used in the intended manner. The charac­teristics and functions which are used in evaluating product quality are called quality characteristics. But there are other elements of product quality besides those noted above: reasonable price, economy, durability, safety, ease of use, simplicity of manufacture and easy disposal. 2- operational quality is the equivalent of product quality in each division within a company; it is not limited to concrete products but includes intangible opera­tions as well. 3- design quality and conformance quality. According to Juran, design quality (,:onsists of ~e quality standards decided on before a product is made, conforman­ce quality comprises the quality features built into a product during the manufac­turing process. They are not identical and must be considered separately. 12

Let us now tum to quality control. Mizuno states that quality control (QC) was first implemented in the United States around 1920 as a statistical tool to improve industrial production. In its earliest days, quality control was limited to certain

IISusumu Yamakage, "A Strategy for IT-led Development," Saito, op. cit., p. 22.

12Shigeru Mizuno, Comparry-wide Total Quality Control, Tokyo 1988 (6th ed. 1992), pp. 4-9; Joseph M. JW'aIl, "Planning and Practices in Quality Control," Lectures on Quality Control, Tokyo: Union of Japanese Scientists and Engineers, 1954, p. 2.

71

technical fields and only later did it gradually come to be regularly applied to company-wide activities. He describes a subsequent Japanese development, total quality control (TQC), in the following:

"Japanese-style total quality control (TQC) is the generic term given to a broad range of quality control activities applied to all aspects of the company's operations. Although this is also called company-wide quality control (CWQC) to indicate its company-wide character, this text will avoid the unfamiliar CWQC and the awkward Japanese-style TQC and refer simply to TQC throughout. ,,13

3.2 Information Technology (IT)

Information Tect,mology (IT) is one of the essential sufficient conditions to which we now tum. Development through IT is designated as IT-led development. According to Yamakage, it may be saidJo be "national development that is led by various types of IT to allow developing countries to enter the information age. 1114

He further elaborates this definition as follows: "To broaden people's world image and improve their lifestyles and living conditions in developing countries, and to realize a less unequal and more harmonious world community in the information age, IT -led development is a type of development of which the process is accelerated, supported, and/or directed by employing various types of IT to transform the society of developing countries in the course of the intensification of information generation, dissemination, and utilization in terms of both quantity and quality. ,,15

Saito has also emphasized and broadened the importance of Information Technolo­gy. On the whole,' society is now at the turning point leading from an industrial society to an information society. He explains the importance of IT not only to developed countries but to developing countries as well as follows:

"Despite significant differences in social situations in different countries, no country can be free from the changes that will occur. In this respect, changes in developing countries will be closely related. The main objective of development is improving the people's welfare by increasing the wealth in society. Indu­strialization is certainly essential for developing countries, but

130p. cit., p. 1.

14yamakage, op. cit., p. 15.

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development through industrialization requires extensive in­frastructure like transportation and energy supply, a large pool of skilled labor to produce quality products, and a stable go­vernment. In fact, many of these requirements are still lacking in many developing countries, and even with favorable factors, it takes a long time to produce successfully high-quality indu­strial products competitive in the industrial market. n16

Saito emphasizes that IT-led development is based neither on traditional infra­structure nor on skills' training. Recent successes by developing countries in applying IT have been noteworthy. Manufacturing industries have become largely automated to insure the production of high-quality products. At present, the reliability and quality of some electronic products from developing countries are higher than international standards demand. As he explains:

"IT application can accelerate the acquisition of manufacturing capability, contribute to education through mass media, aid agriculture development, and promote national integration. At the same time, IT could also have a variety of negative effects. Considering the varietY of effects caused by IT and the social situation in each country, the implementation of IT-led develop­ment cannot follow a single path. To improve the people's welfare, a balanced supply of agricultural, industrial, and information products is essential. A country with superiority in agriculture should pursue efficiency in agriculture utilizing IT, while some countries should improve services industries through IT. In any case, IT itself will be the most promising, future­oriented, value-added industry in any country. In essence, IT must be considered the most important part of national develop­ment. Manufacturing industry in the information society or information age is supported by vast numbers of computers to automate production lines. In such a situation, what is most important in manufacturing is not manufacturing activity itself but the design of production systems and the development of software to keep the control computers active. This is one example of the shift of values. IT represents a collection of technologies needed to support manufacturing industry. n17

It should also be realized that developing countries must establish an industrial base which corresponds to the specific conditions in each country, in order to enable IT -led development to take place. This means that IT-led development requires a systematic industrial basis that can discover an IT suitable to itself, that can provide sufficient hardware and software, and that can support a self-sustai-

16.radao Saito, "Developing Asian Countries and the Information Age,· Saito, op. cit., p. 3.

17Saito, op. cit., p. 3.

73

ning development process. According to Yamakage, such an industrial system must consist of at least the following subsystems: (1) Transfer of IT. When IT has to be adopted from abroad, it must be adapted to meet the needs and conditions of the importing country. IT should be imported from experienced countries, though not necessarily from the most advanced countries. (2) R&D for indigenous IT. Because the information that IT deals with is bound up with cultural elements such as language and way of life, indigenous IT is necessary. R&D (Research & Development) activities are crucial in country­specific IT -led development. (3) Domestic IT industry. If IT industry does not exist in the beginning, then it must be created, especially to support the R&D mentioned above. It is also desirable for the manufacture of culturally relevant IT products and, in some cases, an internationally competitive IT industry could be established.

"The r~lative weights of these subsystems may differ from one country to another. Most important is their balanced combina­tion so that the entire system operates smoothly and efficiently in a given initial environment in a particular country. Within the process of IT [the] industrial base must be enhanced. Because IT industry is kuowledge intensive, high-quality human resources are required, especially scientists and engineers for R & D. They may be educated in advanced countries, but they must be kuowledgeable of their own country's peculiarities to determine [the] appropriate IT to be imported, and to conceive [an] indigenous IT. The infrastructure for the IT industrial base is relatively easy to acquire. IT industry depends less upon the conventional infrastructure of manufacturing industry such as large port facilities, transportation networks, and urban settings than on a stable supply of electricity. Setting of IT industry is not difficult in many developing countries, it is usually an in­tegral part of multinational corporation's global strategies, rather than an integral part of the domestic industrial complex. The pursuit of IT -led development does not necessarily mean rejection of the former, but certainly emphasizes the latter. The design of an industrial base as part of IT -led development planning is crucial for success in the future. "18

There are two factors which may function as obstacles to this development: insufficient infrastructure and information technology illiteracy. As the former is quite familiar, We will confine our discussion to the latter factor. IT illiteracy, as defined by Yamakage, is a syndrome comprising a lack of kuowledge of IT, a lack of eagerness at acquiring IT capability and misgivings on a technology seen

18Yamakage, op. cit., p. 16. [franslator's note: Quotation as given.]

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as being new and foreign. This is a major obstacle to IT -led development. IT literacy is just as essential to IT -led development as conventional literacy was to conventional development. Two results of IT illiteracy are: (1) A shortage of IT scientists and engineers. In developed countries, many IT scientists and engineers coming from the Third World are working for IT advancement, although their home countries are generally unprepared to utilize such human resources. (2) A shortage of IT end-users. Corresponding to the shortage of IT producers, the consumers of IT are also scarce. This shortage ranges from technicians, system operators and foremen to accountants, clerks and teachers. Because neither hardware nor software have been introduced on a broad basis in many countries, this shortage will be with us for many years. 19

Lastly, the need for national leadership must be emphasized. Two major factors ought to be considered, namely self-reliance and international cooperation. (1) Self-reliance. Governments should establish guidelines to promote the development of a self-reliant, domestic source of IT. The guidelines must include specific policies in each of the following areas: indigenous IT, operative IT industry, supply of IT, human resources, economic development, etc. It is important to note that self-reliance does not mean isolating national development, but it should comprise an attitude of maximum exploitation of a country's natural as well as human resources while at the same time utilizing information from abroad. (2) International cooperation. This is the second major factor for national leaders aiming at IT -led development. Yamakage points out four reasons for this: Firstly, while self-reliance assures IT -led development free from foreign constraints, inter­national cooperation can be independently controlled by national leaders. Secondly, the latter enhances rapid understanding of informatization and the information age. Thirdly, international cooperation actually enhances self-reliance by providing a stronger intial impetus to IT -led development. Fourthly, IT-led development demands good access to the global communications network at a certain level of development, in addition to an extensive domestic network. lO

4 Case Examples

4.1 Malaysia

Thong reports that the study, Evaluation of Japanese-Style Management, was at first carried out in Japan to collect data from parent companies and then continued

190p. cit., p. 21.

Wop. cit., p. 28.

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in Malaysia. The following Human Resources Management (HRM) characteristics associated with Japanese management were collected: trade union representation, hiring practices, promotion practices, layoff practices, training practices, consensus decision-making and consultation, contlict and grievance handling, and, quality control circles. (1) Trade union representation. None of the five Japanese subsidiaries in Malaysia have union representations. However, in Japan, four of the five have union representation for their employees. (2) Hiring practices. Three subsidiaries in the banking, commerce and electrical manufacturing sectors followed recruitment policies of their parent companies. (3) Pronwtion practice. Allowing for some qualifications, all five subsidiaries follow the practice of promoting from within. (4) Layoffpractices. Only one subsidiary, in the banking sector, had an explicit policy of not laying off workers. (5) Training practices. In-house on-the-job training (OJT) is practiced by all the subsidiaries. (6) Consensus decision-making and consultation. Communication from the bottom-up in decision-making is usual practice in three subsidiaries. Regular management-labor consultation meetings were held only in the electrical goods and bearings companies, the former with, the latter without, representatives of the unions. (7) Coriflicts and grievance IuJndling. Four subsidiaries settled conflicts and grievances through negotiations and discussions. The banking subsidiary settles its employee relations problems through the management-labor consultation machinery on an ad hoc basis. (8) Quality control circles (QCC).21 Only the two subsidiary companies in the

21Gregory T. s. Thong, "Foundations of Human Resources Management Practice in Japanese compauies in Malaysia,· Yamashita, eel., Transfer of Japanese Technology and Management to the ASEAN Countries, pp. 140-143. The study produced the following results: (1) Evaluation of Japanese-Style Management in Malaysia. The questionaires were sent out in both Japanese and English; 16 managers responded in Japanese, eight in English. We can assume that Japanese managers answered in Japanese and local managers in English. It was therefore determined that differences in the content of answers in Japanese and English must indicate a gap in perception on the effectiveness of Japanese-style management and transfer of technology and management. (2) Transfer of Technology. There are some differences between the Japanese and English evaluations of technology transfer. On the whole, English answers indicate the completion of technology transfer more than Japanese ones do, and local managers evaluated it positively. There are DO answers that show the completion of transfer in 'production,' 'development of DeW product' and 'design' technology, but English answers indicate a higher expectation of transfer in the future than do the Japanese. Local managers expect the transfer of such highly dynamic technology as 'production equipment,' 'development of new product' and 'design technology,' while Japanese managers think that this would be very difficult. Such discrepancy is caused by the different understanding of technology transfer held by Japanese and local managers. Japanese managers point out that Malaysian interests hold that 'transfer of technology' is the same as 'localization of post' and that post transfer will bring technology transfer. Japanese managers insist that post transfer is one of the means for industrialization. (3) Transfer of Management. With respect to the transfer of management, no

76

electrical products and bearing industries, engaged in manufacturing, show evidence of applying QCC.

4.2 Thailand

J. Takeuchi has indicated, aside from the high exchange-rate for Japanese currency, some of the other reasons for the "new wave of technology transfer from Japan": Firstly, business conditions have been improving in Thailand since the end of 1986. The price index of primary goods showed a recovery. Exports of textiles, garments, canned foods, jewelry, etc., were expanding and showed a large spurt after 1987. Secondly, the business climate was improving not only with regard to its macro-base but also in the manufacturing sectors, which have close industrial relations with business activities of Japanese joint-ventures. Thirdly, the Thai government intended to ease regulations governing foreign business activity and to arrange additional incentives for foreign investment after December 1986.22 On Japanese-style management he noted:

"The estimation of sO-called Japanese-style management is changing bit by bit among Thai people, and some local peopie are now inclined to value it more highly. It has been said that Japanese management is informal relations-oriented, but some Thai businessmen suggest that Japanese management is closely related to the personal characters of each local resident and it can only be thought of as informally oriented in this sense ... 23

5 Conclusion

Japan can best contribute to the economic development of Eastern Europe through the transfer of management and organization methods. If this transfer is to take place successfully, two conditions must be fulfilled: (1) The Eastern Europeans countries must establish a firmly based market

differences are found between Japanese and English answers for 'production management' and 'labor management.' More than half of both the Japanese and English answers show the completion of transfer. There are, however, large gaps in the perception of the transfer of 'inventory management' and 'procurement management.' Higher rates of completion for 'inventory management' are found in the English answers while higher rates for 'procurement management' are found in the Japanese ones. As for 'geneJ'lll management,' few Japanese answers show the completion of transfer and many indicate the opinion that snch transfers will be impossible in the future. Local managers, in contrast, seem to be more optimistic about the transfer of general management.

22Johzen Takeuchi, ·'Technology Transfer' and Japan-Thai Relations,· Yamashita, op. cit., p. 212.

23 op. cit., p. 232.

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economy and build an infrastructure to support Infonnation Technology (2) In addition to increasing capital investment, Japan must send technicians to teach and lead in Quality Control and Information Technology. If these conditions are met, Japan can make a successful contribution to the economic restructuring of Eastern Europe.

Transferring Managerial and Organi­zational Methods to Eastern Europe

Georg Schreyoggl

1 Introduction

The transferability of management know-how has been a subject of business administration studies for quite some time now, especially in the field of the so­called comparative management theory. 2 In Germany, this field of research received new impetus from the debate on the Japanese economic 'miracle' and the phenomenal success of certain Japanese MNC's on international markets.

The focus of the discussion is the question of whether managerial and organiza­tional techniques are culture bound or not, i.e. whether management know-how accumulated and validated in one country applies as well abroad (assuming a universal validity as is in the case of knowledge derived from natural science laws) or whether it is a case of a culture specific knowledge which can only reach full effect within the cultural milieu in which it was developed.3 Obviously, the idea of management know-how transfer only makes sense if we can proceed on the basis of a certain amount of universality.

When referring to the transfer of managerial and organizational methods, we imply that they ,really have a significant influence on corporate efficiency and productivity. Although this is by no means uncontroversial-we will, for reasons of simplicity, proceed here as if this were so. Apart from the basic question of culture boundedness, the transfer issue includes a second major problem, namely

1 Professor of Business Administration at the Freie U niversitiit Berlin. This paper is a slightly revised version of a presentation held at the German-Iapanese-Economic and Social Conference, September 27-29 at the Ruhr-Universitlit Bochum, Germany. I wish to thank Mr. Holger Daners for his help in preparing this revision. The original version was translated by Dr. Erich Holz.

2Cf. R.N. Farmer and B.M.Richman, Comparative Management and Economic Progress, Homewood, IL, 1965; E. Keller, Managemem infremden Kulturen, Bern/Stuttgart 1982.

3Cf. F. Harbison and C.A. Meyers, Managemem in the Industrial World, New York 1959; Farmer and Richman, op.cit.; O. Schreyogg, ·Zur Transferierbarkeit von Management-Know-How," Managemem Imernational Review 16 (1976): pp. 79-87.

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how a transfer can be perfonned most effectively. An old truism of organization theory says that introducing new and unknown methods are likely to fail unless special preparatory procedures are employed. When acceptance and definite willingness to change is lacking, resistance to change is the nonnal reaction.

When focusing on the case of Eastern Europe, a third dimension complicates the transfer issue. Not only are we confronted with cultural differences (for example, between the USA and Gennany) but also we face very special basic conditions. The transfer of management know-how has to take place under a canopy of tunnoil transfonnations of economic and social order which affect not just one nation but an entire region. This transfonnation process has just started and probably will take years if not decades to complete.

Therefore, when considering the special case of Eastern Europe every discus­sion on the transfer of management know-how must deal with a threefold approach: In addition to the questions of "whether at all" i.e. the culture boundedness issue, and the "how to" of a transfer, the general social and economic transformation situation and its implications are to be considered. All three aspects are vital with regard to the possibilities and chances of a transfer, but also with regard to barriers and incompatibility. The following paper is designed along this threefold approach, though it will become plain in its c'ourse that the three categories cannot be separated precisely as would appear at the onset. First the cultural aspect shall be examined; it is not only the most basic, but also the one which by now has been subject to the most intensive research.

2 On Culture Boundedness of Managerial and Organizational Methods

Managerial.and organizational methods are always developed in a specific cultural milieu. These are frequently procedures or concepts which arouse in day-to-day business. Later, they were taken up, systemized and generalized by business scholars. Thus, it is very likely that these concepts and methods reflect the cultural environment in which they were developed.4 Culture is seldom a matter of conscious reflection, each of us is part of a culture and lives in and of a culture without even thinking about it. Accordingly, culture is defined in most cases as a collectively shared orientation and behavior pattern.5 The cultural moulding of management concepts is thus an unintentional side-effect of living in

~. N. Kanungo and A. M. Jaeger, "Introduction: The Need for Indigenous Management in Developing Countries," in Management in Developing Countries, ed. R.N. Kanungo and A. M. Jaeger, London 1990.

5C. Kluckhohn, "The Study of Culture," in The Policy Sciences, ed. D. Lerner and H. D. Laswell, Palo Alto, CA, 1951, pp. 74-93.

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cultures. Although, from a methodological standpoint very difficult,6 there are a large

number of empirical studies on type and extent of cultural moulding of manageri­al methods. Unfortunately, until now very few studies have been conducted on Eastern European management and its cultural peculiarities. The following example is typical for this type of research. It is done at the executive level and shows clear cultural differences:

A survey of 817 higher, middle and upper level managers from ten countries was conducted to examine the hypothesis whether the national origin of managers had an influence on their view of "good" management. One of the questions dealt with the acceptance of hierarchies. Asked if a superior ought to be able to answer every question from subordinates, 66% of the Italian, executives answered "yes," 53 % of the French, 46% of the German, but only 10% of the Swedish executives.

A further question referred to the acceptance of informal solutions, sought beyond the hierarchical structure. This was considered an illegitimate procedure for 75% of the Italian managers. Swedish managers, however, were less negative: only 22 % of those questioned rejected such a procedure. 7

When summing up this type of cultural investigation it shows that certain management and organizational techniques are more culture bound than others. 8

In general, it can be said that quantitative methods are less culture bound than qualitative ones. The strongest bounds were found in concepts involving motivation, team work, the exercise of authority, etc. but also in basic attitudes such as risk-taking, openness for change or individual achievement motivation.9

6cr. L. H. Eckensberger, Methodenvergleiche der kullUrvergieichenden Psychologie, Saarbriicken 1970.

7 A. Laurent, "The Cultural Diversity of Western Conceptions of Management, • International Studies o/Management and Organization 13 (1983), pp. 75-96.

8J . Child, ·Culture, Contingency, Capitalism in the Cross-National Study of Organization," in Research in Organizational Behaviour, Vol. 3, ed. L. L. Cummings and B. M. Shaw, Greenwich 1981.

9cr. O. W. England, The Manager and his Value,,:: An International Perspective from the USA., Japan, Korea, India and Australia, Cambridge 1975; O. Hofstede, Culture's Consequences: International Differences in Worlc-Related Values, Beverly Hills, CA, 1980 and "Motivation. Leadership and Organization: Do American Theories Apply Abroad?" Organizational Dynamics 9 (1980): pp. 42-63; I. Jamieson, Capitalism and Culture: A Comparative Analysis of British and American MaRlifaclUring Organizations, Farnborough 1980; A. Sorge, "Cultural Orientation,· International Studies 0/ Management and Organization 12 (1983). pp. 106-138; E. Diilfer,

82

These last aspects are the ones which are of prime importance for questions of transfer, since they form a tacit background not only for management know-how but also for the entire economic system of inducements. There are some general cultural issues which stand for marked differences between ethnic groups. Among the most basic themes are individual responsibility as well as the understanding of free choice and the control over nature. Western cultures are in this respect different from Eastern ones including East European cultures. iO

An overarching dimension is reached if we refer to the basic element of any culture, to communications. At this level cultures can be differentiated according to their degree of context building. In a high context culture information is transmitted within the physical context or internalized in the person, while little is transmitted explicitly. Non-verbal behavior, social status, time frame, situation and external environment all represent a specific meaning. The context is rooted in the past and is learned very early in life by those growing up in a culture. The specific context is of basic importance to understanding the message. A low context culture is just the opposite: the mass of information is vested in the explicit code. 11 The specific meaning of the chosen word transmits all the information necessary to understand the message. According to this high-low continuum, the American or the German culture can be described as low context cultures whereas the Chinese or the Japanese culture would represent high context· cultures. 12

To our knowledge, no studies have been carried out so far whether East European cultures are tending more to high or to low context cultures. However, it seems appropriate to label especially the Slavic culture as tending more to the high end of the scale. In a very practical way, this can be experienced by anyone from North Germany when doing business in Vienna. Hidden agenda have salient importance and are likely to confuse the "aliens."

Indicative of as to whether a culture is high context or not is the emphasis placed on documents and formal contracts. 13 The validity of a contract is subject to various preconditions. Low context cultures strive to make all these precondi­tions explicit; high context cultures use other, more complex and less obvious measures to make contracts valid. The number of lawyers is, therefore, taken as

Internationales Management in unterschiedlichen Kulturbereichen, MunichlVienna 1991.

lOA. Z. Kaminski and P. Strzalkowski, "Strategies of Institutional Change in Central and Eastern European Economies," in InstilUtional Change Theory and Empirical Findings, ed. S. E. Sjostrand, New York 1993, pp. 139-150.

11E. T. Hall. Beyond Culture. New York 1976.

12N. Boyacigiller and N. Adler, "The Parochial Dinosaur: Organizational Science in a Global Context", Academy of Management Review 16 (1991), pp. 262-290.

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a provisional measure of context relevance. While the significance of this 'measuring device' is certainly debatable, it does provide a certain insight: A survey conducted in 1988 by the U. S. Council of Competitiveness on the number of lawyers and public notaries per 100,000 inhabitants showed the following results:

Japan West Gennany USA

11 77

27914

It is far too soon to expect comparative figures for Eastern Europe, but is seems likely that under similar conditions the numbers would be fairly low, i.e. a trend towards high context cultures.

With respect to the transfer of management techniques from West to East this means that all Wocedures demanding clarity and unequivocality will indeed meet difficulties. Formal rules and planning objectives may there be less important for organizational control than we expect them to.

Numerous other studies showing differing behavioral reactions and managerial procedures in different cultural contexts could be cited. IS However, when considering the transfer problem they are all of limited value. Empirically derived differences allow no final conclusions as to the adaptability of a culture. In other words cultural moulding is never deterministic but rather plastic shaping, at least to a certain degree. Cultural moulding is not deterministic-it always allows a degree of non-conformity and reservation. 16 And as to adaptability, Eastern Europe has always shown a high degree of variability-even when the values embedded in management know-how were quite different from the values and attitudes of each national culture.

A simple fit approach, which would only transfer management know-how when the cultural profiles harmonize,17 leads nowhere. It misrepresents the problem as

ISCf. A. R. Negandhi and B. D. Estafan, "Research Model to determine the Applicability of American Management Know-How in Differing Cultures and/or Environments", in Management in International Perspective, ed. S. B. Prasad, New York 1967, pp. 265-267; Keller. op.cit.; K. F. Ackermann. "Wie efftzient ist Personalmanagement in Entwicklungsliindern?" in Globales Management, ed. M. K. Welge, Stuttgart 1990, pp. 159-184.

1~. Konig, "Dber einige Fragen der empirischen Kulturanthropologie", in Kulturanthropologie, ed. R. Konig and A. SchmalfuB, DiisseldorfNienna 1972, pp. 7-48.

17Cf. O. Hofstede, "The Interaction of National and Organizational Value Systems". Journal of Management Studies 22 (1985): pp. 347-357; - et al., "Measuring Organization Cultures: A Qualitative and Quantitative Study Across Twenty Cases" , Administrative Science Quaterly 35 (1990): pp. 286-316.

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a static one, transfer needs, however a dynamic framework. Experience shows that certain methods and techniques cannot simply be excluded from the begin­ning because they do not ex ante fit to the culture. Sometimes, just these methods which do not seem to fit become successful. 18 A number of surprises turned up in the transfer process from West to East Germany. Western firms, which seemed especially "western" in character, often had---contrary to expectations-less trouble in transferring their know-how than some which seemed more "eastern" in their hierarchical structure. For example, the easygoing and cooperative management system with its unobtrusive hierarchy, networking and democratic atmosphere, so characteristic of software firms, was frequently easier to transfer to East Germany than the organizational methods of West German banks, with their emphasis on correctness, punctiliousness and hierarchical distance. If a prediction had been made, it would probably have been the other way around. The rapid adoption of hierarchical systems and far more problems for the apparently alien approach of informal arrangements would have been expected.

In sUmming up the cultural argument, we must, on the one hand, emphasize the obvious cultural differences between Western and Eastern Europe, and on the other hand stress the plasticity and the adaptive potential of cultures. The ability to learn is not only applicable to individuals, but to cultures as well. To see insurmountable barriers in culture due to the transfer of management know-how does not take the already successful transfers to Eastern Europe into considera­tion. A further discussion of this issue however, cannot be completed without considering the second aspect, that is the transformation of the entire economic and social order and the special situation arising therefrom.

3 Transforming the Economic and Social Order as a Precondition

The change in Eastern Europe is often called the greatest change project in human history. Thereby, it is referred to the dimensions of change necessary and the enormous difficulties in implementing them. While speaking of transferring Western (West German) management and organization techniques to East European firms, we must, apart from general cultural problems,19 keep an eye particularly on the fundamental transformation process in which this transfer is taking place.

1~. Knoblauch, "Ist Untemebmenskultur international iibertragbar?" lmageprofile '90, ed. A. Demutz, 3 (1988), pp. 75-83.

19Cf. Kaminski and Strzalkowski, op. cit.; on the former CSFR cf. O. Chaloupka et al., "Transforming a Centtally Planned Economy into a Market Economy: The Case of Czechoslovakia", in Sjostrand, op. cit., pp.: 351-370; on Hungary cf. T. Palankai, "Transition and Conversion in a Small Open and Formerly Planned Economy: Hungary", in Sjostrand, op. cit., pp: 371-386.

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The transformation of the East European countries and thus the change in the general situation for businesses encompasses the following dimensions:20

- the political system (democratic government. rule of law) - the economic order (economic freedom etc.) - monetary policy (unrestricted convertibility) - industrial policy (location advantages. inducements. privatization. breaking up monopolies. etc.) - infrastructure - the educational system (vocational training system) - the value system (encouraging entrepreneurship) - corporate legal structure (establishing the unity of risk. control and profit).

East European firms are thus in a very peculiar situation. A situation in which and for which the necessary management know-how has not been developed.

The transfQrJDation from a system of centnilized plaming to a mixed economic system or to a purely market economy-tbough this still has not been achieved in Eastern Europe yet-9Dd the integration into the Western currency and finance systems. has created quite new decision-making capabilities and considerable decision-making stress for the firms. Decisions involving serious consequences -up to and including bankruptcy4ave to be made in unaccustomed rush and in situations of extreme uncertainty. The likely effects of these decisions are very difficult to predict-which makes the employment of many management methods, that are based on a highly predictable environment difficult. (A good illustration of the transfer problems created by a high degree of uncertainty can be demonstrated by the many failures of the Treuhand firms.)

In addition. infIastructural shortcomings21 such as insufficient communication technology. inadequate road networks. over-age transportation systems and the lack of a reliable public administration limit the freedom of movement in a way that would paralyze many management techniques developed in Western Europe. Simply. because they take the existence of a working infrastructure for granted (e.g. just-in-time).

All these aspects make it obvious that East European firms are in a very special situation. They all stem from a world which emphasized the certainty of decisions and now the challenge of uncertainty has become the uppennost feature.

Moreover. nearly all firms. according to our criteria. are in a very problematic condition. It is not only a question of going bankrupt and of getting into trouble

2OCf. the papers in Trarujormationprozesse in ehemals Volkseigenen Betrieben, ed. H. Albach and P. Witt, Stuttgart 1993.

21CC. W. Gruhler, ·Untemehmensbezogene Umstrukturierung in den neuen Bundes1indern, • Beitriige zur Wirtschafts- unll Soziaipolitik, Cologne 1992; D. von Wiirzen, ·Wirischaftspolitische Herausforderungen in den neuen Bundes1indem,· 7pJ-Erganzungsheft 63 (1993), pp: 29-38.

86

through mismanagement; it is a crisis resulting from the changing of an entire economic system. Enterprises that were perfect companies in the planned economy are foundering in the new situation. Despite this, the firms must be the driving force of change. Within the transformation process it is decisive that the enterprises keep up with the transformation of the economic system, or, even better, lead the process.

This brief enumeration of changed situations points to at least three things which are essential for our subject of transferring management know-how:

1. The primary and decisive theme for the East European firms is change, or more precisely, coping with the fundamental process of change.

2. Every firm is part of an overarching national economic process of change which in the end determines pace and scope of each firm's activity. Only if the overarching and synchronized transformation Process succeeds, the transformation efforts can be effective for indivi­dual firms.

3. It will take many years before Eastern Europe catches up with Western Europe. This implies that an overly impatient transfer of management know-how will be neither useful nor sensible.

In the first euphoria these framework conditions were frequently disregarded, which led to serious failures in many cases.

If-as here-the situation in Eastern Europe and the transfer of know-how is depicted as a situation of change, then process control, that is the question of successfully controlling organizational change processes, moves to the fore­ground.

4 The Transfer Process as Organizational Change

Coping wif:h processes of change is a problem which has been discussed extensi­vely. Organization theory has made essential contributions to the facilitation and management of change.22 The transfer of West European and West German management methods should not proceed without considering these principles derived from the observation of successful and unsuccessful changes and turn­arounds. Of course, applying these principles is in itself a transfer of management know-how on a sort of meta-level, the level of transference. The principles of successful change are used for the transfer itself; the process of change becomes -in the words of current organizational theory-self reflexive. Again, it is

22Cf. w. G. Bennis, K. D. Benne and R. Chin, The Planning of Change, New York 1969.

87

assumed that these principles are not so culture bound as to over-tax the adaptabi­lity of East European cultures.

What are these major principles to be considered? Referring to the specific level at which actions take place, first of all East European enterprises must make restructuring and renewal a process which comes from within. Not a superficial adjustment to managerial and organizational methods imported from the West is needed, but a genuine acceptance and employment of those methods which help deal with actual problems. The ground for successful transfer can only be prepared on the basis of trust and willingness to adopt those foreign knowledge and methods are presented. A recently published study on Russia shows that

- lack of trust in the future, - a feeling of being lost and - the uncertainty in correctly understanding the situation

are the main reasons creating barriers and resistance to Western management know-how.23 Many people have the feeling of being at the mercy of an uncon­trollable situation which hardly makes them receptive for the adoption of new methods. It is going to be very difficult to provide real organizational change without first tearing down old assumptions and orientation patterns.

On the whole, in East Germany thnle approaches were selected for the transfer: (1) Transfer of management know-how in crash-courses (with questionable

success). (2) Know-how transfers via the board of directors (Aufsichtsrat) by co­

opting West German managers in the supervisory boards of East German firms. This approach has been very popular; in nearly every East German company a West German is chairman of the supervisory board.24

(3) Know-how transfers via experienced managers who were either lent to East German firms or took up permanent jobs there. In East Germany it has been demonstrated that the process can be accelerated by incorpora­ting a Western partner (or in many cases a West German parent compa­ny) whlch already has the necessary know-how to help with the trans­formation process. But this cannot be an archetype for Eastern Europe, because it would mean a complete sell-out of productive property and a complete dependence from Western companies. The take over of Eastern firms cannot be the solution. The question, as to how the acceptance of methods is to be achieved, thus has the highest priority.

In sum, at least there are many management and organizational methods which seem to be transferable in the long run. It seems reasonable that know-how ought to be acquired mainly in the fields of corporate strategy, marketing, production, logistics, financing and organization.

23 A. J. Kirov, 'Psychological Resistance to Relations in the Former Soviet Unions,· in SjOslrand, op. cit., pp: 387-396.

24Cf. Wil1schaftswoche 30/1993

88

However, it is important to realize that this knowledge does not comprise a permanent canon of rules to be acquired in a given amount of time. Know-how is in flux and must constantly be expanded and renewed. It is thus essential that the conditions of know-how acquirement must be reflected and shaped by those acquiring it.2S To put it in the words of network theory: East European firms have to gain reliable access to the international information and know-how networks, from which they had been isolated (and still are). Gaining access means acquiring the ability to learn to understand this network and its logic. They have to be connectable, that is they must learn to rapidly absorb and interpret the information available and to adapt their own actions so that other interaction partners can follow up rapidly. 26 Only in this way the necessary dynamization can be guaranteed, and not just through a static transfer of methods.

This refers us to a meta level, the East European firms must acquire the ability to gain the necessary new knowledge on their own initiative in order to join the network:

5 Summary

In summing up we may say that despite existing barriers in cultural and structural areas, a transfer of Western managerial and organizational methods to Eastern Europe is not only sensible but also necessary. There is, however, a distinct danger involved in these transfers. Namely, the recipient may fall behind, become a sort of second choice. If the adopted concepts and methods are not applied creatively and developed further, then a structural dependence results which is highly undesirable for the future of East European enterprises.

2S Albach and Witt, op. cit.

26S. Ghoshal and N. Nohria, "Internal Differentiation within Multinational Corporations," Strategic Management Journal 10 (1989), pp. 323-337; C. A. Bartlett and S. Ghoshal, lnternationale Unternehmensfohrung, German edition, Frankfurt a. M. 1990; H. Albach, "The Transformation of Finns and Markets - A Network Approach to Economic Transformation Processes in East Germany", The Uppsala Lectures, Uppsala 1992.

89

List of References

Ackermann, K. F., "Wie effizient ist Personal management in En~icldungs­liindem?" in Globales Management, M. K. Welge, ed., Stuttgart 1990, pp. 159-184.

Albach, H., "The Transformation of Firms and Markets-A Network Approach to Economic Transformation Processes in East Germany, n The Uppsala Lectures, Uppsala 1992.

- and P. Witt, eds., TransJormationsprozesse in ehemals Volkseigenen Betrie­ben, Stuttgart 1993.

Bartlett, C. A~ and S. Ghoshal, Internationale Unternehmensftihrung, Frank­furtlM 1990.

Bennis, W. G., K. D. Benne and R. Chin, The Planning oj Change, New York 21969.

Boyacigiller, N.' and N. Adler, "The Parochial Dinosaur: Organizational Science in a Global Context," Academy oj Management Review 16 (1991), pp. 262-290.

Chaloupka, 0., et al., "Transforming a Centrally Planned Economy into a Market Economy: The Case of Czechoslovakia," in SjOstrand, op. cit., pp. 351-370.

Child, J., "Culture, Contingency and Capitalism in the Cross-National Study of Organization, " in Research in Organi:Qltional Behaviour, L. L. Cummings and B. M. Shaw, eds., Vol. 3, Greenwich 1981.

DIDfer, E. Internationales Management in unterschiedlichen Kulturbereichen, Munich/Vienna 1991.

Eckensberger, L. H., Methodenvergleiche tier kulturvergleichenden Psychologie, Saarbriicken 1970.

England, G. W., The Manager and His Values: An International Perspective from the USA, Japan, Korea, India and Australia, Cambridge 1975.

Farmer, R. N. and B. M. Richman, Comparative Management and Economic Progress, Homewood, IL, 1965.

Ghoshal, S. and N. Nohria, "Internal Differentiation within Multinational Corporations," Strategic Management Journal 10 (1989), pp. 323-337.

Gruhler, W., "Unternehmensbezogene Umstrukturierung in den neuen Bundesliin­dem, n Beitriige zur Wirtschafts- und Sozialpolitik, Cologne 1992.

Hall, E. T., Beyond Culture, New York 1976. Harbison, F. and C. A. Meyers, Management in the Industrial World, New York

1959. Hofstede, G., Culture's Consequences: International Differences in Work-Related

Values, Beverly Hills, CA, 1980. -, "Motivation, Leadership and Organization: Do American Theories Apply

Abroad?" Organizational Dynamics 9 (1980), pp. 42-63. -, "The Interaction of National and Organizational Value Systems," Journal oj

Management Studies 22 (1985), pp. 347-357.

90

- et al., "Measuring Organizational Cultures: A Qualitative and Quantitative Study Across Twenty Cases," Administrative Science Quarterly 35 (1990), pp. 286-316.

Jamieson, I., Capitalism and Culture: A Comparative Analysis of British and American Manufacturing Organizations, Farnborough 1980.

Kaminski, A. Z., and P. Strzalkowski, "Strategies of Institutional Change in Central and Eastern European Economies," in Sjostrand, op. cit., pp. 139-150.

Kanungo, R. N., and A. M. Jaeger, "Introduction: The Need for Indigenous Management in Developing Countries," in Management in Developing Countries, R. N. Kanungo and A. M. Jaeger, eds., London 1990.

Keller, E., Management in/remden Kulturen, BernlStuttgart 1982. Kitov, A. J., "Psychological Resistence to Market Relations in the Former Soviet

Union," in SjOstrand, op. cit. , pp. 387-396. Kluckhohn, c., "The Study of Culture," in The Policy Sciences, D. Lerner and

H. Q. Laswell, eds., Palo Alto, CA, 1951, pp. 74-93. Konig, R., "Dber einige Fragen der empirischen Kulturanthropologie," in

Kulturanthropologie, R. Konig and A. Schmalfufi, eds., DiisseldorflVienna 1972, pp. 7-48.

Knoblauch, E., "1st Unternehmenskultur international iibertragbar?" in Ima­geprofile '90, A. Demuth, ed., 3 (1988), pp. 75-83.

Laurent, A., "The Cultural Diversity of Western Conceptions of Management," International Studies of Management and Organization, 13 (1983), pp. 75-96.

Negandhi, A. R., and B. D. Estafen, "Research Model to Determine the Applicability of American Management Know-How in Differing Cultures and/or Environments," in Management in International Perspective, S. B. Prasad, ed., New York 1967, pp. 256-267.

Palankai, T., "Transition and Conversion in a Small, Open and Formerly Planned Economy: Hungary," in Sjostrand, op. cit., pp. 371-386.

Schreyogg, G., "Zur Transferierbarkeit von Management Know-How," Manage­ment International Review 16 (1976), pp. 79-87.

Sjostrand, S. E., ed., Institutional Change Theory and Empirical Findings, New York 1993.

Sorge, A., "Cultural Orientation," International Studies of Management and Organization 12 (1983), pp. 106-138.

Wiirzen, D. von, "Wirtschaftspolitische Herausforderungen in den neuen Bundesliindern," ZjB-Ergiinzungshejt 63 (1993), pp. 29-38.

German Unification and the Effects on Central and Eastern Europe

Hisashi Watanabe l

1 Introduction

It all started when Hungary began in May 1989 to clear away the barbed wire marking its border with Austria and then in September to allow refugees from the GDR to continue on to West Germany. A mere two months later the Berlin Wall had crumbled, for nearly thirty years a grim symbol of the East-West conflict in Europe. Less than a year later the unification of the two German states was reality. In the very next year Croatia and Slovenia declared their independence from Yugoslavia. And finally, at the end of 1991, the Soviet Union collapsed, not only marking its end in post-war history as a super-power, but also the end of its entire course of its history since its founding in 1922. In a postscript to this development, the Czech and Slovak Republics decided to end their union in 1993. In a few breath-taking years the political order in Central and Eastern Europe had been turned upside down.

It seems paradoxical that German unification was the immediate cause of the dissolution of state order in Central and Eastern Europe, whereas in Western Europe it served to accelerate the existing integration process. But the contrast between integratien in the West and disintegration in the East indicate that the political order in Europe must be examined in the context of the cold war. Consequently, the current turbulence in all of Europe since 1989 is probably only understandable in the historic context since 1945. However, it is not sufficient just to examine the status quo in Europe. Over and beyond this it is important to compare the secular social dynamics of Europe with those non-European societies, in particular in East Asia, in which a completely different dynamism was effective. Hence, the motivation for examining recent European dynamics from a Japanese point of view.

Bringing this inquiry down to a concrete level, I find it expedient to start with a comparison between Germany and Japan following the Second World War. In this regard I am especially interested in the difference in market dynamics in the two economies, since the peculiarities of each economy can be traced back to this

lProfessor of Economics, Kyoto University

92

difference.

2 The Continuing Economic Growth of the Federal Republic of Germany

2.1 In the mid-1980s there was a famous controversy between Abelshauser and Klwnpf over the commencement of the reconstruction phase in the West German economy. Abelshauser regarded 1947 as the decisive year in which the path was laid out for the momentwn of the reconstuction process to develop.2 In contrast, Klwnpf emphasized the decisive significance of the reorientation of orderly policy in 1948.3 The difference of only one year between the two contrary views symbolized the different standpoints on economic history and economic policy in West Germany. On the one hand it was about an estimation of the contribution of the occupation policy of the Western allied powers to the reconstruction of the West German economy, and on the other about the problem of the continuity of the more or less permanent growth trends in Germany's economy since the previous century under various regimes.

If we look at the conditions in Japan, a different set of problems demand attention. It must also be determined whether we have to deal essentially with a. reconstruction or a new construction. Certainly, both concepts are closely related. There is no purely quantitative reconstruction, but always a degree of qualitative change. In this sense reconstruction is also new construction. Nonetheless, it makes sense to distinguish between the two categories for a typological creation, so that the differences between Germany and Japan can be typologically concep­tualized. With respect to this problem it seems to be the general opinion in Germany, as well as in Japan, that there exists an essential parallelism between both frequently admired reconstruction processes. While this idea is true to a certain extent, it overlooks the typological difference mentioned above. In Germany we are dealing with a reconstruction, in Japan with a new construction. At this point it is necessary to examine whether and to what extent this thesis corresponds to the facts.

It cannot be denied that the reconstruction process in West Germany helped that ,chamcteristic to a breakthrough which had only existed as a potential prior to the Second World War. Thus, the real mass conswnption society in West Germany only arose out of the reconstruction process in the 1950s. To this extent there may be noted a certain discontinuity in the style of conswnption and, consequently, in the corresponding industrial structure prior to and after the Second World War. However, this course was already set out in the period

lw'emer Abelsbauser, Wirtschaftsgeschichte der Bundesrepublilc Deutschland 1945-1980, Frankfurt a.M. 1983, pp. 4045.

'Rainer Klumpf, Wirtschaftsgeschichte der Bundesrepublilc Deutschland, Stuttgart 1985, pp. 104-105.

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between the wars.4 An example for this is the case of the Volkswagen Works, quite apart from the other renowned automobile manufacturers, mostly founded in the 18808. VW is considered to be one of those companies which smoothed the way for the reconstructing economy of West Germany to the age of mass consumption. While VW was set up in 1938 under the Nazi regime to offer a plain and cheap car model (KdF-Wagen) to the German people, it was not until the 19508 that VW began as a German trade mark with the mass production of cars.s But even then, the West Gennan public was not seen as being wild about the motorization of its daily life. It was just the same with respect to other dura­bles, regarded as indispensable in the age of mass consumption. In this sense there is essentially continuity toward consumption dynamics, and in the corresponding industrial dynamics as well, and therefore the West German case is typologically one of reconstruction. Thus, the West German economy resumed its original path after the interregnum of war production.

2.2 In contrast, the rebuilding of the Japanese economy is seen typologically as a new construction. The Japanese consumption style was, as in Germany, completely broken up in the catastrophe following capitulation. The burdensome road to rebuilding was by no means simply a return to the consumption style of the 19308, but instead, in the long run, went off in a completely new direction.' Thus, Japan showed a far stronger discontinuity in its change after World War II. However, industrial structure showed a certain continuity because the war economy existing since 1931 had forced an exaggerated militarization on indUStry7 which necessarily led to an acceleration in the build-up of heavy industry. Thus, a greater difference arose during the war between consumption style and the

4w. w. Rostow, The World Economy, London 1978, p. 408; Knut Borchardt, ·Die Bundesrepublik Deutschland in den .sikuIaren Trends der wirtschaftlichen Entwicklung," in Wach.mun, Krisen, HandlungsspielriJume der WiTlschajtspolitik, ed. Knut Borchardt, GOttingen 1982, p. 144; W. Abelsbauser, Die Iongen FiinftjgerJahre, DUsseldorf 1987, pp. 56-60.

'Hans C. Graf von Seherr-Thoss, Die deursche Automobilindustrie, Stuttgart 1987, 2nd ed., pp. 316, 417.

'An exhaustive examination of the term ·consumer revolution" in post-war Japan is to be found in Kazushi Obkawa & Henry Rosovsky, Japanese Economic Growth, Stanford 1973, pp. 157-160. How­ever, the authors overlook the fact that the concept traditional cannot be definitively defined in modern Japan. For an interpretation of the change in life style in Japan in the age of mass consump­tion cf. Kounosuke Odaka, ·Seichou no Kiseki" rrrace of Growth](2), in Koudoseichou [High Economic Growth], ed. Yasukicbi Yasuba & Takenori Inoki, Tokyo 1989, pp. 181-200; Takafusa Nakamura, Shouwashi [History of Shouwa] n, Tokyo 1993, pp. 5S4-S60; Daikicbi Jrokawa, Shouwashi Sesouhen [History of Shouwa Social Life], Tokyo 1994, pp. 47-55, 101-103.

7Masayasu Miyazaki & Osamu Itou, "Senji-Sengo no Sangyou to Kigyou [Industries and Enterprises in the Wartime and after the War],· in KeiIcakuko to Minshuka [PIannization (sic) and Democra­tization], ed. T. Nakamura, Tokyo 1989, p. 180.

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industrial structure than existed in Germany. All the more dramatic was the change-over of this war-nurtured industry under a forced de-militarization to a peacable orientation. These relationships led to a new transformation in consumption style from the supply-side. The Americanization of life style acted as a catalyst. The massive influence of the de facto sole occupying power, the United States, accelerated a new metamorphosis of the Japanese consumption style. An illustrative example of this is the collective school lunch which with the supply of wheat and powdered milk from America became the starting point for a long-term change in Japanese eating habits.s It is also a cause of the present structural crisis in Japanese agriculture, with its declining domestic market for rice.

This process is but only a new phase in the eternal change in consumption styles in modern Japan, which started up with the forced opening up of the country in the middle of the last century. The classic consumption style, crystalize;d in the previous Edo period, began to deviate, a development which must be seen as resulting from foreign pressures rather than from endogenous and autonomous modernizing forces. Ironically, this supple passivity gave the Japanese market an individual dynamic, along which Japanese producers oriented themselve from the beginning of industrialization. The continual change in consumption styles constantly offered them new sales opportunities, on which· they always concentrated their attention. Thus, every transformation in consumption styles was regarded as a national double innovation, i. e. opening up new demands with new products. Therefore, Japanese producers oriented themselves mainly toward the autonomous and dynamic home market. The export market had only a complementary or marginal importance.9

2.3 In comparison to the orientation of the Japanese economy toward the domestic market, the West German economy showed a considerably stronger export intensity ever since the reconstruction period, which is also a strong indicator of the typological differences between the economic structures of both countries. As early as 1952 the foreign trade balance of the young Federal Republic showed a surplus; exports made out 13.4 % of the GNP, 10 proof that it had succeeded in establishing itself on the international market. In the following years this percent-

SOsamu Soda, Kome wo Kangaeru [Think about Rice], Tokyo 1989, p. 125.

9Shortly before the outbreak of the first oil crisis, Ohkawa and Rosovsky argued that, "[a]fter World War n, Japan's foreign trade proportions declined markedly especially compared to 1910-1940. Although the reasons for this are hard to pinpoint, there is no doubt that this decline must have contributed to an easier situation with respect to any external constraint .• Ohkawa & Rosovsky, op. cit., p. 188.

lOStatistisches Bundesamt, Stalislisches Jahrbuch for die Bundesrepublik Deutschland 1954, pp. 279, 148*.

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age grew constantly, passing the threshold of 30% in 1989. 11 However, this export share is not as high as in the smaller neighboring states. In comparison to Japan it is just in another category altogether.

The share of exports in Japan's GDP (resp. GNP) has almost always been lower than 20% throughout its modern economic history since the beginning of the 20* Century. 12 This value is the lowest of all leading industrial states, excepting only the United States.13 Despite this, the misconception has been growing in the public view since the 19708 that the Japanese economy is structurally characterized by its strong export orientation. Perhaps this perception is due to the fact that since the end of the 1960s-with the exception of the two oil crises-Japan had accumulated an enormous balance of trade surplus. And since this facts stands in crass contrast to previous experience it has been politically exaggerated and more or less disturbs all foreign trade relations. The main cause for the accumulated balance of trade surplus, even if it seems a paradox in view of the structurally low export-rlependency of the Japanese economy mentioned supra, is by no means to be found in "export-led growth. "14

What we have here is not a high export intensity, but a low import dependency of the Japanese economy, seemingly a paradox, since Japan was long viewed as the world's largest customer for raw materials and food stuffs. At any rate, the reason for this odd export-import difference can hardly be reduced to a single cause.

3 German Industry and the West European Market

3.1 The secondary sector is not only the mainstay of Germany's excellent export performance, it is. also the backbone of its industrial structure. The share of value added of industry out of the total GDP from 1960 to 1990 amounted to 45.8% as

1I0ECD, Historical Statistics 1960-1990, Paris 1992, p. 71.

l,ppei Yamazawa & 'Yuzou Yamamoto, Chouki Keizai TouJcei Suikei to BunseJci. 14: BoueJci to Kokusai Syuhshi [Estimates of Long-term Economic Statistics of Japan since 1868. 14: Foreign Trade and Balance of Payments], Tokyo 1979, p. 3; Obkurashou [Ministry of Finance], Zaisei Kinyuh TouJcei Geppou [Monthly Report of Financial and Monewy Statistics], KDku Kokusai Shuhshi Tokushuh [Each Special Issue for Balance of Payments].

13Historicai Statistics, p. 71.

14Japan,s supposed 'export-led growth' has already been examined by Obkawa and Rosovsky. "Our

position is that Japan's rate of growth of exports has been high and well above world averages because the rate of growth of its economy and especially of its industry has been high and well above world averages, and not vice versa. Given the complex interaction between domestic growth and international trade, it is not easy to demonstrate the validity of this view conclusively, but our thinking runs along these general lines .• Obkawa & Rosovsky, op. cit., p. 173.

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compared to 43.2% in Japan and 38.4% in the total of OECD-Europe.15 As to the share of employment in industry in the same period, it amounted to 44.9% as compared to 34.3% in Japan and 36.1 % in the total of OECD-Europe.16 In the fields of value added until the end of the 1960s and employment until the beginning of the first oil crisis the share of West German industry was higher than that of services. In the precise meaning of the term the Ferderal Republic was the country in the OECD group with the highest degree of industrialization. 17

3.2 Where do German exports go? Mainly to EC and EFTA nations. In 1990 the exports to West European countries amounted to 73.2% of all German exports. The share of the seven neighboring countries alone amounted to 40.5%. Herein France was the main trading partner of the Federal Republic, as an importer (13.0%) as well as exporter (11.8%).18 Interestingly enough, the trade share of these same seven countries and of France individually with the Vereinigtes Wirtschaftsgebiet (preceeding the Federal Republic) in 1949 was with 48.1 % resp. 13'.9% remarkably similar. 19 Thus, it was the neighboring markets, especially the French market, which provided the strongest and stablest basis for growth of Germany's industrial economy.

In contrast, the Japanese industry usually turns to America when it is forced to look for foreign markets. The share of exports to America from the Japanese total' amounted to 31. 5 % in 1990.20 This percentage was greater than the sum of German exports to its three most important customers, France, Italy and Great Britain (29.4%). None of Japan's neighbors, e. g. South Korea, Taiwan and

15Historical Statistics, p.62.

16ibid., p. 40.

17Hartmut Kaelble, Auf dem Weg zu einer europiiischen Gesellschaft, Munich 1987, pp. 25-30, argues for a European industial intensive employment structure. He views this European particularity as being closely related to the strong export orientation of European industry and the strong position of the craft trades. But his thesis still lacks conf1fIlllltion, since the sectoral distribution of employment and added value are not always congruent, to say nothing about discrepancies in the industrial classificationS in various countries. For cxample, in those handicraft branches where production and small-scale trade are combined in the same fmn, they are conventially listed in Japanese statistics in the tertiary sector. As a consequence, the secondary sector in Japan is statistically weaker than it really is. Cf. Soumuchou Toukeikyoku [Management and Coordination Agency, Statistics Bureauj, Mhon Hyoujun SangyouBunrui [Standard Industrial Classification of Japan], 1993, pp. 442, 470-492.

18Statistisches,Jahrbuch 1993 for die BRD, p. 323.

19Statistisches Amt des Vereinigten Wirtschaftsgebietes, Winschaft und Statistik, Vol. I, New Series, No. II, Feb. 1950, p. 341.

2OSoumuchou Toukeikyoku, Nihon Toukei Nenkan [Japan Statistical Yearbook], 1993/94, pp. 410-411.

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China, can claim a comparable market role like the United States for Japanese products. However, the importance of the East Asian countries has been increas­ing with their high growth rates following the oil crises so that the collective share of the DABs (Dynamic Asian Economies) and China finally topped that of the USA in 1991. Just the same, the USA maintained at 28.2% the first place, with Taiwan as the second largest importer of Japanese goods at a mere 6.3%.21

The contrast in bilateral relations between Germany and France on the one side and Japan and the United States on the other illustrates the differing foreign trade constellations faced by Germany and Japan, leading to differing economic perfor­mances, though showing certain common characteristics. Thus, we now come to the differences in both bilateral relationships.

3.3 The difference in the relationships between both sides of the Rhine and between both sides of the Pacific corresponds simply to the difference in geographic distances, this having not only a quantitative but also a qualitative character. The former is characterized by symmetry, the latter by asymmetry. At least until the unification of the two German states France more or less maintained a balance with West Germany in important economic criteria. In contrast, the United States is twice as large in economic criteria as Japan. As far as physical size and the presence of natural resources are concerned, Japan can hardly compete with the USA, even less so in the field of military power. Despite this, since the late 1960s Japan has been in a stronger position in the foreign trade balance with America. 22 Exports to America are seen as the largest source of ac­cumulating a trade surplus. Not surprisingly, the about-tum in the bilateral trade balance has subjected Japanese-American relations to stress and strain, sometimes reaching crisis proportions. Although Japan is closely coupled to America in its economic and security policies, their interdependence is hardly stable and balanced. In contrast, a stable and neighborly partnership grew up between France and the Federal Republic. There has even grown up a sort of bilateral division of labor within the framework of a united Europe, in which Germany leads in eco­nomic matters while France takes the lead in foreign policy.

In the differentiation of the German and Japanese situations, historical factors were reinforced by current ones. Even during the Second World War the United States was the undisputed superpower in the allied camp. In contrast, France had been occupied by Germany from 1940 until 1944; it was only by Churchill's strategic manipulations at the Yalta Conference that France was accorded a truncated occupation zone along the Franco-German border, an open admission of its position as the weakest of the occupying powers. These constellations induced

221n 1965 Japan achieved for the first time since the Second World War an export surplus in trade with the USA. Since then its trade balance with the USA has always been positive, excepting only 1%7 and 1975. Zaisei Kinyuh Geppou, No. 496, 1993.8, pp. 66-67.

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France, much sooner than could have been expected, to seek a close relationship with the new Federal Republic, in order to somehow moderate the Anglo­American hegemony in post-war Europe.

The declaration in 1950 by the French foreign minister, Robert Schuman, proposing the setting up of the (West) European Iron and Steel Community in place of the International Ruhr Authority, founded in 1949, achieved an implicit shut-out of Anglo-American influence in the international administration of the coal and steel industry in the Ruhr, even though France had already gained fairly important concessions during the negotiations on this authority. 23 It is likely that this new institution was viewed in France at first as an instrument for gaining a renewal of reparations and for regaining its lost initiative in security policy in Western Europe. Ironically, the founding of the European Coal and Steel Community in 1952 became the cornerstone of West European integration. Out of France's efforts on behalf of West European integration-intended not merely to administer West Germany's coal and iron industry collectively, but to integrate all of West Germany into the West European system-arose not a vertical relationship between a weak victor and a strong vanquished, but essentially a horizontal interdependence between two neighbors. Modem European history up to 1945 did not lend itself to expecting this result. France quickly realized that it could not maintain its position against the Anglo-American predominance in Western Europe without a genuine partnership with the Federal Republic.

In contrast to France, the United States saw no necessity in East Asia to build up a balanced partnership with the defeated Japan. Thus, it is difficult to deny that here a quasi victor-vanquished relationship still lives on.

4 The Franco-German Relationship

4.1 The balanced economic interdependence between Germany and France has also generated stability in their political relations which itself engendered the historic change-over to a business-like atmosphere of cooperation and absense of power politics in West Europe following the Second World War. These tension­free relations in a part of Europe granted a political and social stability to the Federal Republic which had consequences for its economic development.

But France as well was able to draw great benefits from the Franco-German partnership, especially as it allowed France to maximize the effects of its foreign policy actions. France's security policy, which often did not look beyond its own national interests, still did not contradict that of the Federal Republic. Both now entered into, a symbiosis, which was singular in Europe following the Second

23Cf. Carsten Luders. "Die Regelung der Rubrfrage in den Verhandlungen uber die politische und okonomische Stabilisierung Westdeutschlands 1947-1949," in Wirtschaftspolitik im britischen Besatzungsgebiet 1945-1949. ed. Dietmar Petzina & Walter Euchner. Dusseldorf 1984.

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World War. Furthermore, the Federal Republic was also able to gain geopolitical profits

from this partnership, since the western border regions were now finally tension­free ever since the return of the Saar region to Germany. In its security policy Germany had been compelled, ever since the previous century, to deal with the problem of having two fronts, in the west and in the east. This geopolitical factor had had a negative effect on the domestic balance since the spacial divergence weakened the social and economic cohesion of Germany and intensified the dif­ferences between the West and the East within Germany.24 Following the reconcilliation with France, the western front was no longer a problem for the Federal Republic, which only had to deal with the problem of the eastern front. This single-front structure is a conspicuous characteristic of modem German his­tory. Ironically, it was the East-West dividing line direct through Germany which obliviated any east-west tensions within the Federal Republic, though the economic differentiation between the western prosperous Rhine valley and the eastern stagnant areas along the strategic East-West border could not be over­looked.

4.2 What we observe is more of a differentiation between the south and the north of the Federal Republic. However, this spacial problem was not driven by any serious centrifugal force as had been the former east-west problem. While the south as well as the north possess a spacially specific dynamic, the homogeneity of both regions in economic and social structure is quite high. And in their foreign trade activities both turned to the Western neighbors. Both regions grew up as twins on the Rhine.

Of course, it shouldn't be ignored that the north was able to maintain a far stronger position than the south until the structural crisis in the coal industry came to a head in the mid-1960s. North-Rhine-Westphalia was even considered to be a "new Prussia" (as Kurt Schumacher put it) among the then ten Lander or states, due to its large population and domestic product, which might have endangered the federal structure of West Germany. However, in the long run, the slow but steady decline of the coal industry, due to the world-wide revolution in energy sources since the late 1950s, served to strengthen the balance between

24For early arguments on the divergence in market orientations between East and West Germany cf. Max Weber, "Die wirtscbaftlichen Grundlagen des 'Imperialismus'", in Wirtschaft und Gesellschaji, ed. Max Weber, Tiibingen 1922. After the Second World War these problems were taken up again in the seminal work of Knut Borchardt. Cf. his "Regionale Wachstumsdifferenzierung in Deutschland im 19. Jahrhundert unter besonderer Beriicksichtigung des Ost-West-Gef"alles", in Wirtschaft, Geschichte und Wirtschaftsgeschichte, ed. Wilhelm Abel, Knut Borchardt, et.al., Stuttgart 1966. In Japan Tomoo Matsuda has studied the East-West differentiation in Germany since the 1940s. Cf. Tomoo Matsuda, Kindai no Shiteki-Kouzouron [Historical Structure of Modern Times], Tokyo 1948.

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north and south. The crisis of the north was the ascent of the SOUth.2S Thus, the so-called "south-north gap", a catchword since the early 19808 in regional structure policy in West Gennany, is probably a new phase in the south's rise to prosperity.26 To this extent the economic history of West Gennany was also a process toward further intensification of its federal character, organized around two centers.27 Any possible centrifugal forces were balanced out by the adhesive force of the north-south Rhine connector. Thus, West Gennany was able, in the context of West European integration and with the backbone of the Rhine connector, to achieve regional stability at a higher level than ever before in modern Gennan history.

S Transformation of the Franco-German Relationship

5.1 Close. economic interdependence between the Federal Republic and France resulted in ever greater similarities in the economic structures of both states. Just after the Second World War there were still great differences between both societies. Since then they have come to resemble each other closely. 28

In the field of production it was especially odd that the share of value added of agriculture out of the French GDP (1960-1967) was still 8.8% as compared to 4.8% in West Gennany and 7.8% in the EEC. In employment structure this was even more pronounced: 19.3% in France, 11.9% in West Gennany and 18.1 % in the EEC. During the long enmeshing with the West Gennan economy French agriculture slowly lost its erstwhile importance. In the period 1980-1990 the share of agriculture in value added and employment in France had declined to 3.9% resp. 7.5% and in West Gennany to 1.9% resp. 4.5%.29 On the other hand, the

2SOn the crisis of the north cf. Rheinisch-Westfilisches Institut fil.r WJrtschaftsforschung (RWI), Nordrhein-WesJjalen in der Krise - Krise in Nordrhein-Westfalen? Berlin 1985.

Upor an economic-historical analysis of the "south-north-gap" cf. Hubert Kiesewetter, "Das wirtschaftliche Gefille zwischen Nord- und SUddeutscbland in historischer Perspektive,· in NelleS Archiv ftlr Niedersachsen, vol. 35, no. 4, 1986. He regards the five northern lAnder as comprising the "North." The term was examined in a regional-sociological view by Jiirgen Friedrichs, Hartmut Hiussennann & Walter Siebel, cds., SfJd-Nord-GefllIIe in der Bundesrepublilc? Opladen 1986.

27Just the same, the proportion of the population living in North-Rhine-Westphalia rose slightly from 26.5% (1950) to 27.2% (1990). But in the same period the proportion living in 8aden-Wii.rttemberg rose more rapidly, from 12.9% to 15.4%. Stotistisches Jahrbuchftlr die BRD. 1952, 1992.

280n the profound convergence of the German and French societies after World War II cf. Hartmut Kaelble, Nachbam am Rhein, Munich 1991.

29Historical Statistics, pp. 40, 62.

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industrial West Germany is turning into a services nation. Thus, the industrial structures of both countries are converging. In the 1980-1990 period the share of value added from industry of the GNP in Germany and France 40.5% resp. 30.7% as compared to 52.7% resp. 39.4% in the 1960-1967 period; the share of value added from services in the same period 57.7% resp. 65.5% as compared to 42.5% resp. 51.8% in the 1960-1967 period.30 Thus, we have come to a reversal in the relationship between the secondary and tertiary sectors in West Germany. Nor, on the whole, is the convergence in industrial structure in both countries to be denied,31 even if industry remains more important in the Federal Republic than in other West European nations.

In the field of consumption it is the common aspects which are first noticed: the shares of private as well as government consumption out of the total GDP in both countries is approximately equal, regardless of whether constant or variable.32 There does exist a great difference in foreign trade. The French share of export of goods and services out of the GDP amounted to a mere 13.3% from 1960 to 1967, whereas this amounted to 18.5% in West Germany and 19.3% in OECD-Europe, though the French value was already far higher than the Japanese (9.8%). In the meantime the French share had continually increased, as had Germany's, so that in the 1980s it amounted to 22.3%, though still lower than Germany's 29.9% and 28.7% in OECD-Europe.33 This convergence of consumption structure probably indicates a convergence in living styles and consumption trends in both nations as well.34 Of course, per capita private consumption calculated in current prices per person (PPP) is consistently somewhat higher in France than in Germany, though only by 6% at the most.3'

The process toward a single market in the EC has probably done much to promote a bilateral assimilation of consumption structures in Germany and France.

5.2 The continued convergence in the economic structures of the two neighbors is likely to have altered their relationship. This has changed from an earlier interdependence based on a division of labor-due to their differing industrial

3Oibid., pp. 62-63.

31cr. Kaelble, Nachbam, chap. 7.

32Historical Statistics, p. 66.

33ibid., p.71.

34For a detailed account of the rapid and vigorous convergence in coDSUmption styles cf. Kaelble, Nachbam, pp. 164-166.

3S0EeD, National Accounts. Main Aggregates, Vol. I, 1960-1992. Paris 1994. pp. 146-147.

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structures-to a competitive relationship due to the similarity in industrial struc­tures. Thus, it can no longer be assumed that the French market has the elasticity necessary to guarantee further growth to the German export economy. This is probably also true for the other markets within the EC and EFf A.36

A statement like this may sound paradoxical with the West European share of West German exports steadily increasing in the 19808; this share grew markedly from 66.1 % in 1980 to 73.3% in 1990. In contrast the share of the USA and Canada grew slightly, from 6.8% to 8.0%, while Asia's share (excluding Japan) declined from 7.3% to 6.4%. Japan's share grew from 1.1 % to 2.7%. As a consequence, the sum of the shares of North American and East Asian countries grew from 15.2% to 17.1 %, but the gap to West Europe grew just the sameY

The trend toward an increasing importance of the West European market for German exports was by no means accompanied by steadily higher growth rates. In international comparison, while the Federal Republic was seen as a "stability conscious" nation, it was also viewed as a "low-growth" economy in the 19808.38

West Geimany's GDP growth rate of2% in the period 1979-1990 was lower than the 2.3% of the previous period 1973-1979. It was also lower than the OECD rate of 2.3% in the same period. This last was lower than the American growth rate of 2.6%, not to mention the Japanese rate of 4.1 %.39

Thus, the growth trend for the West European markets for West Germany's exports ran parallel to the sinking trend in its growth ability. The West European market was thereby revealed to be shifting ground for the growth of Germany's export-intensive economy-in contrast to the post-war reconstruction era.

The crisis awareness in view of the satiation of the domestic market capacity was shared by all West European countries. Both the Single European Act of 1987, aimed at completing the integration of the single market by the end of 1992,40 as well as the bilateral efforts of the EC and the EFTA to found the EEA41 may be viewed as common efforts by an export-oriented Europe to shake

360n the growing similarities of the European societies in the 2()d> century cf. Kaelble, Au/don Weg.

37 Statistisches Bundesamt, Lange Reihen, pp. 156-157; Statistisches Jahrbuch fib' die BRD, all vols.

3Bwemer Glastetter, GUnter Hagemann & Ralf Marquardt, Die wirtschaftliche Entwicklung in der Bundesrepublik Deutschland, 1950-1989, Frankfurt 1991, p. 167.

39Historical Statistics, p. 48. For a critical examination of evaluations of the up-turn since 1982 cf. Glastetter, et.al., op.cit., pp. 37-46.

4Opaol0 Cecchini, The European Challenge 1992, N.P. 1988.

41 Art. 1 states: "The aim of this Agreement of association is to promote a continuous and balanced slrengthening of trade and economic relations between the Contracting Parties .•• with a view to creating a homogeneous European Economic Area." Council of the EC I Commission of the EC, Agreement on the European Economic Area, Luxembourg 1992.

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up the congealed inner-European market capacities and to give them new prospects for growth. Those common technology political programs such as EUREKA (European Research Cooperation Agency, 1985) and COMETT (Community Action Programme in Education and Training for Technology, 1986) were probably motivated by a feeling of crisis in West Europe about the impen­ding exhaustion of its market capacity. Thus, West Europe was now forced not only to intensify its single market, through own product and process innovations, but also to regain a more vital competitiveness on domestic and foreign markets.

6 Opening Up New Markets for West German" Industry

6.1 In 1980s West German export-oriented business had to deal with innovations not only in the production field but also in the area of marketing, i.e. opening up new markets outside Europe. In this decade both America and Japan had overcome the negative effects of the oil crises relatively rapidly. In consequence, the North American market grew much more vigorously than the West European, and the East Asian market even more so, where not only Japan but also the NIEs (newly industrialized economies) continued their remarkable economic growth following the oil crises. Of course, the market dynamics of both non-European regions must have been highly attractive to West Germany's export business. A hefty battle with American and Japanese competitors was, however, hardly to be avoided both in the North American as well as in the East Asian regions.

In view of this market situation, Central and Eastern Europe seemed to offer Germany's export business relatively better opportunities, especially since it was thought to have a more competitive position than non-European business due to the historical and cultural relations, once the indigenous economic systems had been reformed. However, the indigenous consumption standards had remained at pre-war levels during the forty-year hiatus of centralized planned economy. Thus, there were enormous qualitative differences visible in consumption styles between both parts of Europe. But the historic and cultural homogeneity could not be denied.

6.2 With reference to the historically shaped cultural homogeneity the consumption structure of Europe may be termed "culturally linked. " The concept of cultural linkage in consumption structure refers mainly to the secular direction of consumption dynamics of a society. As long as the mode of change of con­sumption style clings steadily to a single direction, it is not only to be accorded a higher status in the values scale, but can also turned into a principle of economic policy. Thus, consumer policy only has to stick to these principles, to be recognized as being socially just and sensible. In connection with the aims of economic policy, the consumption structure gains cultural importance. Thus, it is now one of the social norms that consumption style is not arbitrarily alterable nor may it hang in an undeveloped stasis. It should just steadily develop in that

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direction in which the prosperity of the society can sensibly increase. It is in this sense that consumption structure is said to be culturally linked.

The economic importance of the cultural linkage of consumption structure lies in the fact that it has a double-edged effect on the dynamics of the domestic market. On the one hand it is a wonderful cultural guarantee for a stable increase in size of the domestic market to a specific limit, but also a heavy burden which runs the market capacity into an ever deeper rut. Now the consumption structure of West Europe is, in comparison to that of modern Japan-though not of pre­Meiji Japan-, essentially culturally linked. This characteristic doubtlessly had a postive effect during the reconstruction period on West European economies after the war. Especially in West Germany, the efficiency of the innate drive in the reconstruction process could be maximized, because the orderly system of the social market economy-thanks to the richness of the heritage of intellectual currents-could draw on socialism as well as liberalism to set adequate economic policy g~s. 42 The trend of continued growth in the Federal Republic extended far beyond the 19508 to the early 1970s, though mainly in three complete cycles: 1950-1958, 1959-1967 and 1968-1975.43 Since the fourth cycle (1975-1982), however, the cultural linkage has largely lost its hitherto positive effect, because the first reconstructed and then completely satiated West European domestic market has in the context of its stringent cultural linkage essentially exhausted its potential. The guarantee of culture has gradually become a burden of culture.

On the other side, Central/Eastern Europe lost its vigor of consumption style right after the Second World War. Centrally planned economies can only be conducted with a starkly rigid consumption structure and international economic climate. Thus, these economies were forced to aim not at a flexible consumption structure but at a frozen one. Of course, they could with success achieve a quantitative expansion in their economies. But this by no means consists of improvements in consumption quality. In order to justify the necessity of asceticism as a quality of consumption, the leaderships were often forced to take refuge in the most abstruse ideological excuses. In this, the cultural linkage of consumption structure in Central/Eastern Europe was very strong, even in comparison to West Europe.

6.3 In contrast, the consumption style of modem Japan changed continuously and in all directions as well, which may be explained by the necessity of Japan's business world to adapt as fast as possible to changes from abroad. This exogenous mode of change entails an alienation from all goals which are based on religious or ideological ideals, no matter what kind of economic policy is being pursued. Of course, up until 1945 a nationalistic pragmatism predominated, with the slogan "Enrich the state to strengthen the military!" as a sort of raison d'etat,

42willy Kraus, Sowle Marktwinschaji, Bonn 1990, p. 24.

430lastetter et al., op. cit., p. 40.

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which accorded a certain ethical character to private consumption style. Despite this, the consumption style was even then highly variable and its change was based on no spiritual guideline. Since 1945 an unadorned utilitarianism paired with naive pacificism prevails. In the meantime, the post-war generations have discarded the worn-out robe of asceticism that their parents wore. To this extent we may designate the Japanese consumption style as "culture-free" or "culturally neutral, " although Japanese think of this secular process of change as the Japanese style of modernization. At any rate, the highly variable consumption style of modern Japan has been thoroughly purged of the cultural burden which has had a profound effect on Japanese business. This cultural neutrality has accorded Japan's market capacity an especially high flexibility.

Access of culturally linked European consumer articles to a culturally neutral Japanese market is made all the more difficult by a decline in status of European cultural values brought about by the Americanization of life styles; in contrast, culturally neutral Japanese consumer articles have easier access to the culturally linked European markets. This is probably one of the odd categories of non-price competitive forces working for Japanese industrial products, although it is just understood to be a kind of non-tariff-barrier.

6.4 Turning our attention to Central/Eastern Europe, an enormous potential for raising consumption quality is building up, directed toward West Europe. And with the dispersal of East-West tensions in Europe an accumulated demand for the most up-to-date West European consumption quality has been accentuated. Now, in the eyes of West German manufacturers, Central/Eastern Europe ought to have appeared to be a gigantic market for West Germany's products. Since purchasing power was still low , all that had to be done was to convert potential demand into effective demand. It must be remembered that there were considerable differences in living standards in Central/Eastern Europe. Now one country had to be chosen in market strategies as a bridgehead for opening up the entire Eastern market.

At that time the Federal Republic was bordered on the east by Austria, Czechoslovakia (and since 1993 by the Czech Republic) and the GDR. These states, in tum, were bordered on the east by Yugoslavia (after 1991 by Slovenia), Hungary, Ukraine (since 1993 by Slovakia) and Poland. In this constellation, the three states bordering the Federal Republic were vitally important for its market strategy. And of these states, the two socialist ones were more interesting.

At the end of the 1980s the political situation changed in Czechoslovakia relatively smoothly, more dramatically in the GDR. Without any presage, the Federal Republic found windfall to achieve that aim which no one expected any longer, i.e. the opportunity of overcoming the permanently "provisional" division of Germany. The Federal Republic now had the choice of integrating the GDR by stages or all at once. It was finally decided to proceed the latter way, though with a three months intermediate in which the currency union was set up. Here we ought to examine the problems which this political decision entailed at the time.

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6.5 The fonner way would have at first been to create an economic association with the GDR and then intensifying this by stages. But this would have meant placing the GDR on a level with Austria. However, it would not have been realistic to treat the GDR de facto like a second Austria, since it was still in­tegrated militarily in the Warsaw Pact and economically in the COMECON. On the other hand, the COMECON no longer had any meaningful function and so the Federal Republic was allowed to shape its economic relationship to the GDR without restraint. In the situation at that time, it would even have been a realistic decision to let the GDR maintain its security relationship with the Soviet Union while drawing it economically into the Western orbit. The new status of a socially and economically westernized GDR would probably have resembled in a certain sense Finland's status. This twin character would probably have allowed a smoo­ther and more orderly transfonnation from a centrally planned economy to social market economy. 44

Of course, a number of problems had already become acute, which apparently only a massive intervension by the Bonn government could solve. Among these were the growing masses of migrants coming to West Gennany from the GDR as well the catastrophic environment pollution there, which were to push the Kohl government toward a policy of advocating a total absorption of the GDR in the shortest time possible. This also coincided with the favorable foreign policy constellation at the time. However, it ought to be examined whether the inner­German problems have not been overly politicized.

It is a fact that the route taken by the Bonn government allowed it to grasp the initiative in the process of transforming the system. It can hardly be denied that the government was enabled by a complete reunification to prevent any attempts at sabotaging its drastic refonn policy by a surviving GDR rump government. It is questionable, however, whether the Bonn government aimed from the start at a 'scrap-and-build' policy, since the Federal Republic had a far too optimistic picture of the existing economic situation in the GDR.4S

6.6 All the same it must have been in the interest of West Germany's economic policy to use the GDR as a bridgehead to reconstruct the potential market in all Central/Eastern Europe. The perspectives for a transfonnation of the GDR in this sense might have been as follows:

(1) At first the East Gennans, with their relatively high purchasing power,

440n the transformation from centrally planned to social market economies in the GDR and East and South-East Europe see Kraus, op. cit.

4SOn the rapid changes in the estimations of the total value of GDR assets through the federal government cf. Eckart Schremmer, "Integration und Desintegration: Die Vereinigung dec heiden Teile Deutschlands, DDR und BRD 1989 bis 1993. Vortrag in 1993. II.," in Doitzukeizoi no Rekishiteki­Kuhkan [Historical Spaces of German Economy], ed. Minoru MOTota et 01., Kyoto 1994, pp. 277-278.

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could show themselves as eager consumers of goods from West Germany. It would be a heavy blow to the limping East German consumer goods industry which would of necessity force it to restructure itself, with the help of investments from West Germany, and to equip itself with the most modern productive means from West Germany.

(2) Then, the so-to-speak restructured East German consumer goods industry, its competitive powers (price and non-price) refreshed, would better fulfill its former function as supplier to the other countries in Central/Eastern Europe. In addition, it could eventually reclaim markets lost by the West German consumer goods industry to the threshold nations. At the same time, East Germany would be a prime market for capital goods for consumer goods production.

(3) After this initial development what we would have in East Germany was a further purchasing substitution of capital goods from West Germany for the consumer goods production, in order to produce them themselves and even, with a certain delay, to offer them to other Central/Eastern European nations. Simul­taneously, East Germany becomes a market for capital goods from West Germany for the capital goods production.

(4) Finally, East Germany would attain that stage of development wherein it produces its own capital goods for capital goods production and can offer them to other Central/Eastern European nations. As a consequence, the industrial site Germany as a whole would be fundamentally stronger. <16

This development by stages involving the transformation in the supply of goods from one part of Germany to the other would have been a wave-like opening up of the Central/Eastern European markets by the East German industry, with the assistance of West German investments, no doubt greatly to the advantage of West Germany. However, this scenario seems to have completely ignored the prospect that a reconstructed East German economy would prove one day to be a mean competitor for the West German economy.

7 The two South-North Gaps

7.1 The reunification of the two German states should be seen not merely as a renewal of the kleindeutsche unification47 but also as the creation of a opportunity for new regional combinations. This could generate new regional tensions within

46nris scenario has by now been realized, though only fragmentarily, since the East Germans-with their high purchasing power potential-bought heavily on the West German and international import markets. The hope of a reconstruction of the industrial sites between Elbe and Oder was disappointed, since the unexpected deindustrialization in East Germany continued on until 1993. Ibid., pp. 284 ff.

47Transiator's note: The "minor-German" unification was historically the unification of the German states in 1871 to form the German Empire, excluding Austria. The groj3deutsche or "major-German" unification would have included Austria.

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a unified Germany and complicate the effects of German unification on Central/Eastern Europe. Such a perspective links up with the assumption that the regional differentiation in the both German states led to an acceleration of the reunification efforts. These tension involve gaps between north and south as well as east and west.

7.2 As already mentioned, ever since the 19808 the "south-north gap" had been the most pressing problem of regional policy. And it is almost certain that this differentiation in regional dynamics stems from the structural changes in the international economy following the oil crises. This catchword reflected the pessimistic outlook for heavy industry in the Ruhr and Saar regions as well as for shipbuilding in the Hanseatic cities, since the older industries were badly hit by the structural crisis resulting from a heightened competitiveness on the world markets following the oil crises. The strongest economic state up till then, North­Rhine-Westphalia, lost its leading position, though this was rather a more even balance between south and north. This resulted in a change in the interdependence between south and north, rather like that between France and West Germany, since measures of economic policy sought a restructuring of the old industrial states in the north toward that of the "model state" of Baden-Wiirttemberg.48 Evening out income levels and intensifying industrial homogeneity among the· states also increased competition within Germany.

At first the south was in a more favorable position than the north, since the latter had to reorganize somehow its industrial structures. While the north had certain advantages through its excellent infrastructure for catching up with the high technological lead by the south, in marketing it was definitely at a disadvantage since the south had already established itself in the representative branches for export, even though competition on the international market with the USA and Japan was becoming more intensive. And if the climate was becoming rougher for the south, the north had to make even more effort. Thus, not only the north but also the south had cause enough to turn to the east to open up market opportunities that were still fresh. The competition between the north and the south for the initiative in opening up the eastern markets likely served to ac­celerate the unification process.

7.3 In a similar process, a north-south-gap was noticeable in the GDR. The economic position of the south, in Saxony, Thuringia, and to an extent, Saxony­Anhalt, grew weaker in comparison to the north, Berlin and Brandenburg (these names, of course, were not current in the GDR), as was shown by the relative de­cline in population in the southern eight districts (Bezirke, as they were then

48For a diagnosis and therapy from the bands of practitioners ct. Dos Sild-Nord-GefaJ1e, ed. Rudiger von Voss & Karl Friedrich, Stuttgart 1986.

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known).49 The system of centrally planned economy had no success in the GDR in creating a regional balance. Berlin and its environs, as the focal point of the GDR, sucked up all potential for regional development. From 1946 to 1988 the population of East Berlin rose by 8.0%, whereas the population of Leipzig, the second largest city, shrank by 11.7%. so It is therefore not surprising that the south saw itself forced to turn west to reduce the exploitive predominance of the north, especially by reconstructing its former economic integration with North­West Germany. In fact, it was Saxony which took the initiative in pressing for a reform of the system, and later in forcing reunification. The system transformation in the GDR may be interpreted as Saxony's reprisal against the central authorities in Berlin. 51

The south-north gap is clearly reflected in the results of the Volkskammer elections on March 18, 1990. The Alliance for Germany (CDU, DSU and DA, all conservative groupings) won 47.8% of the votes. In the southern seven electoral districts their results were even better. In contrast, the SPD (Socialists) and the PDS (Communists) together won 38.1 % and more in the northern eight electoral districts. In Berlin the PDS was the second largest party after the SPD.52

7.4 The interests of an impoverishing Saxony corresponded exactly to those of Hamburg, which was suffering from the decline of its traditional shipbuilding industry and shipping companies. The stagnation of Hamburg's economy, which was cut off from its hinterland on the middle and upper EIbe by the Iron Curtain following the Second World War, was in crass contrast to the shining development of Rotterdam, which probably profited the most from West European integration along the Rhine. In this much, the interests of Saxony and Hamburg more or less coincided. On the one hand, Hamburg could bind itself more closely to Berlin.53 For Saxony the reconstruction of the EIbe connection to

49.rhe percentage of the GDR population living in the southern 8 districts declined from 66.6% in 1946 to 63.2% in 1988. Starisrisches Jahrbuch der Deutschen Demokrarischen Republik, annually. This might be regarded as one of the few plausible data in the economic statistics.

SOlbid.

SIWhat stands out is a history of Saxony, which appeared shortly before the GDR's downfall, concluding that present-day Saxony had a highly balanced economy and not mentioning relations to the Berlin region at all. Cf. Geschichte Sachsens, ed. Karl Czok, Weimar 1989, pp. 586 ff.

S2For an analysis of the voting results cf. Wolfgang-Uwe Friedrich, Pluralismus in der DDR, Konigswinter 1990, pp. 43-49.

s3Unemployment in Hamburg in 1990 was at 10.5% the second highest of all the eleven old states after Bremen. In the meantime, it has managed to reduce this considerably. Consequently, in 1992 Hamburg was with 7.9% unemployment in the middle of the scale. In this far, Hamburg was able to profit the most by reunification, especially through a rapid reconstruction of the connection with Berlin. Starisrisches Jahrbuch 1993 ftJ.r die BRD, p. 128.

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Hamburg was probably the most important prerequisite for rebuilding its economy. In this much, it would be somewhat problematical if the federal government were to place more emphasis in its regional structure policy for East Germany on the Hamburg-Berlin connection than on the Hamburg-Saxony connection. Thus, it is still open to discussion, which regional integration is more appropriate to completing the integration of both parts of Germany.

The reconstruction of the Elbe connection, which is still awaiting realization, could also have an effect on the economic integration of Saxony and the Czech Republic and in all probability towards an integration of Germany with Central/Eastern Europe. This new outlook for regional policy may be considered a factor in the separation of the Czech and Slovak Republics, since Slovakia, as one of the Danubian countries, is more oriented toward a connection with Bavaria, Austria and Hungary.

The new phase, therefore, comprises not only the Elbe region but also the Danube !t'gion. The opening of the Main-Donau-Kanal in the Summer of 1992 points to the outlooks for further intensification of the economic interdependence of Bavaria and the Danube countries. S4 Of course, opening the canal had at present only a symbolic meaning in this respect, since construction on the Danube section between Straubing and Vilshofen is at present ongoing or still in planning, not to mention the blockade of the Serbian section of the Danube due to the waf in Bosnia. Despite this, Bavaria, Austria, Slovakia and Hungary will probably be induced by the ambitious construction performance to take a hand in shaping their common interest in the Danube. Also, it cannot be overlooked that Austria's economic "Anschlufi" with Germany will be realized de Jacto in 1995 through its admittance to the EU, something unimaginable in 1955 when Austria was forced to declare its neutrality in order to regain its sovereignty.

Finally, it wouldn't do to ignore the direction of development of the Baltic coast region all the way to Estonia, which would nearly close the ring stretching from Sweden around to Finland, ignoring for the while disturbing Russian points at Kalinen'grad and S1. Petersberg. The prospective membership in the EU of the three Scandinavian countries in 1995 will at any rate be an opportunity to greatly strengthen the integration of the Baltic region. The expansion of the EU in the north-eastern direction will likely be seen as a further result of Germany's

, reunification.

8 Conclusion

The reunification of the two German states was the result of the historical­structural facts as well as their common interests in the current international political and economic climate. For these reasons, the effects of German

s"Rhein-Main-Donau AG, RMD INTERN 3/1992, Eroffnung des Main-Donau-Kanals.

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reunification would be highly significant for Central/Eastern Europe. Now there are three major directions of regional effects, i.e. south-east along the Danube across Austria, eastwards along the Elbe through the Czech Republic and southern Poland and north-east along the Baltic coast through northern Poland. Due to the feedback of these three vectors, it will not be so easy to balance out the interests of southern and northern Germany as previously. When the East German economy is finished some day with its reconstruction, the balancing of the regional German triade will become far more difficult. In any case, the Rhine connector will in the future hardly be able to maintain its near monopoly in the integration of Europe and be forced to adjust to the changed conditions, which will in tum produce a certain change in the interdependencies of the Rhine valley nations. The waterway connectors, Rhine, Elbe, Danube and the Baltic Sea, each with its own dynamic direction will have a powerful influence in the new constellation on regional dynamics not only in Central and Eastern Europe but also in Western Europe, whereby far more complicated centrifugal forces than up to 1990 would arise in the "Third German Republic." It will probably become one of the most difficult challenges for its regional structure policy.

The Economic Effects of German Reunification on West and East Europe

Willy Kraus l

1 Introductory Remarks

The fonnulation of the theme which I have been asked to prepare might easily create the impression that Germany's reunification fonned the historic impulse which in the end caught up all Central and Eastern Europe in a gigantic change­over. Thus, it seems necessary to emphasize right from the beginning that there are good reasons for having other views. German unification is only a part, a detail of the historic system change-over in Central and Eastern Europe which has radically altered the political, economic and social landscape of all Europe. Even today we are unable to state with any certainty which structures will finally emerge from this momentous process. It is, however, safe to say that Germany's role in the events following the collapse of the communist system in Central and Eastern Europe-including the Soviet superpower-has changed considerably. The territory of reunited Germany is one-third larger than that of the old Federal Republic. The population is one-fifth larger. But apart from these quantitative factors, the major qualitative factor is the fact that with the abolition of Germa­ny's division the,political weight of our country necessarily had to increase with the passing of the provisional state in which the Germans had to live for four decades under limited sovereignty.

Also, it is far too easy to forget that the communist part of Germany was not only a. continual ~t to the external security of the old Federal Republic, but that even the other members of the Warsaw Treaty organization were threatened as well. The German communists were especially zealous in wanting to take part in the bloody repression of the Hungarian uprising against Stalinist rule. In the repression of Dubeek's reform Communism in Czechoslovakia in 1%8 they were again painfully conspicuous. And even communist Poland was never comfortable with the neighboring GDR. Thus. the final crash of the European trouble-maker and its absorption by the Federal Republic was viewed with some satisfaction and no little relief even by fonner members of the Warsaw Treaty organization-ilOd

lEmeritus Professor of East Asian Economics. Rubr-University Bochum.

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was naturally linked with a considerable growth in sympathy towards the Federal Republic. But it is just this development, the increased prestige and political importance which has led also, apart from reservations on German unity at home-mainly among the extreme left-wing on the intellectual seene-, to a fear among our Western partners of German dominance in Europe, something which they wish to avoid at any cost.

All this resulted in renewed maneuvers to integrate Germany more firmly into the European unification. The dramatic events of the last five years, especially the Wlpredictably total and chaotic dissolution of the Soviet Union, has caused us to forget that in early 1990 our Western partners were principally worried about what political route a reunited Germany was going to take in the future. Doubts were raised as to whether Germany would continue along the way to European integration. It was even feared that a unified Germany might chose to drop out of the NATO. In this case-as was emphasized-appropriate security measures against unilateral German moves would be called for. 2 Thus, there is good reason for agreeing with the view of the current president of the German Federal Bank that German unification "accelerated already existing plans for a European econo­mic and monetary union. ,,3 However, Europe should not become an "illusionary haven" for us Germans, as Arnulf Baring remarked, citing a formulation by Brigitte Seebacher-Brandt.4

Of course, there are also other basic standpoints on the question of German unity. One important argument states that, "the economic consequences of German unity present a great challenge to the capital markets and demand considerable exertions in rebuilding infrastructure, production sites and jobs in East Germany. ,,' According to this standpoint it would certainly been better, easier and appropriate if Germany had at first concentrated on this "single, almost fateful challenge" and accordingly slowed down the integration efforts in the European Community.6 It shouldn't be ignored, on the one hand, that German unity was not a gift-I refer again to Western reservations thereto. Without the active assistance of the EC and its members unity would not have been so easily achieved. On the other hand, we must realize that while in Germany the rapidity

2Cf. Ein vereimes Deutschland. Sieben Pluspunkte Jilr Europa und die Welt, documentation by the Bundesverbandes der Deutschen lndustrie e. V., April 1990.

laans Tietmeyer, "Vortrag am 10. Januar 1992 aoliiBlich des Neujahrsempfanges der Industrie- und Handelskammer in Berlin," Deutsche Bundesbank. Ausztige Qua Presseartikeln, January 14, 1992.

4AmulfBaring, Deutschland was nun? Berlin 1991, p. 119; Brigitte Seebacher-Brandt, Die Linke und die Einheit, Berlin 1991; cf. Tietmeyer, op. cit.

'L. MUller, "Priisident der Landeszentralbank Bayern am 14. Januar 1992 in Augsburg,· Deutsche Bundesbank. Auszilge aus Presseanikeln No.4, January 14. 1992.

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of events leading to unity was seen as being absolutely necessary, this was not the perception in the rest of Europe.7 Also, the EC made a present of many plausible arguments to the latter group to exercise serious criticism on sense and appro­priateness of some of its political measures. On the erection per se of a common European single market there is probably general agreement, differences occuring mostly over the various attempts to delay its completion or to undermine certain already existing regulations. 8 But the centralizing tendencies to transfer more and more economic powers to EC organs have given cause for great concern, for example the commitment in the Maastricht treaty to formulate a new industrial policy, or the increase in the EC budget from a current 2.5 billion ECU to more than 4 billion ECU in 1997 for research and development proposed in the Delors­II-package, or the planned harmonization of social policy activities to ward off the dangers of "social dumping" by the poorer southern EC members. The EC concept, "harmonization," is a paraphase for a spread of regulation or even a proliferating interventionism, which "in political jargon is increasingly supplant­ing 'competition' as a conceptual constituant of market economy allocation systems.,,9 Christian Watrin was quite right in referring to the "harmonizing passion" of the supreme EC-commission, "extending from baby pacifiers and food to basic units of measurement. ,,10

Of course, especially in view of recent events in Eastern Europe, there is cause to severly criticize the centralizing efforts of the EC-commission. Whereas the Eastern European states, following decades of struggle with centralist economic systems and decision-making structures, are making all effort to speedily and comprehensively decentralize---sometimes under pressure from the West-the EC is moving in the diametrically opposite direction in handing over whole areas of politics to the community and raising its ability to intervention. After all, everyone ought to know that prosperity in Western Europe developed so well,

7Heinz-Dieter Wenzel, 'Okonomische Perspektiven der Vereinigung Deutschlands und der Integration Europas," Otto-Friedrich-Universitiit Bamberg, Volkswirtschaftliche Diskussionsbeitriige No. 42, 1990, p. 23.

8por a detailed description of the continued existence of restrictions on intra-Community trade and services see Christian Watrin, "Europas ungeldii.rte Ordnungsfragen," Die personale Struktur des gesellschaftlichen Lebens. FestschriftfUr Anton Rauscher, ed. Norbert Glatzel and Eugen Kleindienst, Berlin 1993, pp. 177 f.

9wenzel,op. cit., p. 199.

IOChristian Watrin, "Maastricht - der richtige Weg zur europiiischen Einigung?" Forum - Strategische Neuausrichtung deutscher Unternehmen? Maastricht und die Folgen, DUsseldorf: Ingersoll Engineers, 1993, pp. 21.

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"because the European states were competing with one another. ,,11

In any case it could hardly be expected that German unity would have no effect on the economy and politics of Western Europe; after all, the abolition of Germany's division occurred at the same time as Europe's division was abolished. Also, the direct influence of German unity on the reordering of Eastern Europe cannot be overseen. It is, however, completely different from the German "Ostpolitik" of the Brandt government at the time of the social-liberal coalition. This aimed at removing West Germany, in its geopolitical situation at the east­west divide, from the focal point of east-west confrontation-in particular through recognitionl2 of the eastern political, economic and social system while remaining anchored in the Western alliance. At present, however, we are confronted by the task-again determined by our geopolitical situation in Central Europe-, not of recognizing and thereby conserving dictatorial and communist forms in govern­ment, economy and society, but of actively helping to overcome them through effective assistance in the democratization process and in the transformation to a market oriented and freedom-loving economic and social system, especially by opening up our markets. At the Economic Forum Eastern Europe, held in Berlin on September 22, 1993, Georg Krupp, member of the supervisory board of the . Deutsche Bank, warned against protectionist tendencies, saying that

" .. .it was precisely the EC which had ruined the export oppor­tunities of other countries through market restrictions. A greater willingness on behalf of the West to liberalize imports would have been the most effective, more likely the only effective aid which it could extend to the reform states. "13

On the occassion of his visit to Washington in October 1993, the prime minister of the Czech Republic, Vaclav Klaus, called upon the Western countries to open up their markets for goods from Eastern Europe. This would be of more assistan­ce to the reform states there than loans or other forms of aid.

In the meantime, the well-known connection between political and economic systems (including monetary policy) has been demonstrated to us in day-to-day economic policy. As early as September 1990 the board of governors of the Deutsche Bundesbank saw reason to announce, "that a monetary union is a nondissolvable solidarity commonwealth which according to experience needs a

liN. Berthold, "Europa nach Maastricht - Die Skepsis bleibt," Aus Politik u1ll1 Zeitgeschichte. Beilage zur Wochenzeilung Dm Par1ament, July 9, 1993, p. 29.

12In the current political discussion the term "recognition" is juxtaposed with the more nuanced concept "respecting" as a relatively non-comittal and harmless posture toward the communist world, and especially the former ODR. As far as we are concerned, the terms are exchangeable since we are not dealing with the diplol1llllic recognition as covered by international law.

13Georg Krupp, "Die Markle Osteuropas - Chancen und Herausforderung,· Wirtschaftsforum Osteuropa, Berlin Sept. 22, 1993.

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more extensive bond in the fonn of a political union if it is to be lasting. nl4 Thus, we in Western Europe have been charged with the task-under the precondition of a monetary union according to the Maastricht treaty-of beginning the construction of a political union. I cannot hide the fact that, together with many colleagues, I can imagine a more efficient European reorganization which other than the Maastricht treaty is not based on a monetary cartel, but allows the currencies to compete and also takes into account the rich regional cultural diversity and the many forms of political expression as well. IS However, if we proceed from the Maastricht treaty as a precondition, it is necessary to set up a political union within the context of the EC.

In Eastern Europe the idea of a new political union in the east comparable to that in Western Europe ought to be viewed with horror. Nor will it frod much support among the major political personages, especially if a successor state to the Soviet Union should emerge under whatever name. There is a considerable difference whether states join together voluntarily and decide without coercion to realize certain forms of integration or are forced by brutal power politics into a community of serfs. At any rate, it ~ be safely assumed that both Western and Eastern Europeans have had too much experience with imperial powers to want to repeat it.

2 Effects of German Unity on Western Europe

The view has cropped up among Western European neighbors-and in some non­European industrial states-that German reunification has had a deleterious effect on Europe's economic development. Of course, this argument is coupled to the fear that the rest of the world, especially the rest of Europe-our EC or EU neighbors-is going to be burdened with the costs of German reunification, whether it wants ,to or not. There are several replies possible:

2.1 Germany's reunification has by no means weakened business activity but has on the contrary given it new impulse. Starting with the day the border between the Federal Republic and the Democratic Republic opened up on November 9,

l"Tietmeyer,op. cit.

15Norbert Berthold, ·Wirtschaftliche Integration in Europa - sind wir auf dem richtigen Weg?" Probkme der VollendlUlg des Binnenmarlctes in Europa nach 1992, ed. Erhard Kantzenbach, Berlin 1990, pp. 3 ff.; -, "Europa nach Maastricht - Die Skepsis bleibt," op. cit.; Manfred J. M. Neumann, "In die Am dec Euro-Mark,· Frankfurter Allgemeine Zeitung (FAZ), April 25, 1992; -, "Wahrungen im Wettbewerb," FAZ May 3, 1990; Roland Vaubel, "Currency Competition and European Monelary Integration," The Economic JoumallOO, 1990, pp. 936 ff.; -, "Orundfragen einer gemeinsamen Wabrungspolitik,· Schrilte zum europilischen Binnenmarlct, ed. Erwin Dichtl, Munich 1992, p. 223; Wa1rin, "Europas ungeldirte Ordnungsfragen, " op. cit.; -, "Maastricht - dei richtige Weg zur europiischen Einigung?" op. cit.

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1989, up until the end of the year, visitors from East Germany used the so-called "Begrii6ungsgeld"-greeting money accorded East German visitors from public funds-mainly for purchases in retail shops in the West. The expenditure oflocal and regional government on this greeting money amounted to about OM 2 billions. At the end of 1989 this greeting money was superceded by a travel­currency-fund. GOR-citizens were able to exchange GOR marks up to an equivalent of OM 100 at a rate of 1:1 and up to a further OM 100 at a rate of 1:5. Under these conditions, in the fIrSt half of 1990 the difference between West German "exports" of goods and services to and "imports" from East Germany rose to about OM 7.5 billions.

With the coming into force of the currency, economic and social union on July 1, 1990 and the conversion of GDR-marks in OM, the East German population had at its disposal currency reserves amounting to some OM 130 billions. In the second half of the year current income was substantially expanded by steep wage hikes and a large pension adjustment at the rate of 1: 1. In the following year the gigantic West German transfer payments started up, amounting in 1991 to some OM 1007 billions net, the results of which are an increasing disassociation between the demand development and the declining production development. !6

All this led to a gigantic surge in purchases by East German consumers. Since the East German supply was hardly competitive and didn't conform to consltmer desires, the buying spree was concentrated at first on the West German retail trade and led to an increase in orders with domestic manufacturers, which, in view of the West German suppliers already producing to capacity, engendered a large import impulse. For many EC partners this high export demand from Germany acted as a counterweight to their own economic recession, in which idle production reserves could be mobilized especially for exports to Germany.!7 These growth impulses ensuing from reunification at any rate served to delay and soften the coming world-wide business recession in West Germany and its European partners. It certainly cannot be denied that the unification process, in the form of an extreme hunger for consumer goods in the East German popula­tion, sparked off a considerable demand for imports and thus had a strong expansive effect on the economies of the European partners. Germany had taken over the function of a 'growth locomotive' through its unification.!S

Germany's increased demand for imports benefitted its neighbors in the EC the

11ioeutsche Bundesbank, Monatsberichle, Sept. 1993, p. 40. This reports the net public payments for East Germany as DM 107 billions for 1991, DM 117 billions for 1992 and DM 138 billions for 1993.

170Die westdeutsche Wirtschafi unter dem EinfluB der iikonomischen Vereinigung Deutschlands," Monatsberichle, Deutsche Bundesbank, Oct. 1991.

18 Otmar Issing, "The Impact of German Unification on the Members of the European Community. Lecture at the Finance and Investment Seminar of the Edinburgh and Stirling University of Edinburgh, 23 October 1992," Deutsche Bundesbank, Auszage aus Presseartikeln, No. 75, Oct. 25, 1992.

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most. Between 1989 and 1991 their exports to an expanded Gennany rose by 23 percent. The highest growth rates in this period were achieved in the Spanish economy. Another figure indicative of this development: All EC-partners together delivered nearly twice as many cars to Germany in 1991, 1.55 millions, as in 1989. Even after the beginning of 1992, Gennany still exerted an import demand on the economies of the partner countries.

2.2 The foreign trade situation of Gennany has changed fundamentally since reunification. In place of a balance of trade surplus, always a cause for irritations among our partners, there is now a deficit. "The dimension of change amounts to nearly DM 150 billions from 1989 to 1992, or about 5 percent of total GNP. ,,19

Of course, a whole series of factors were involved in this change, e. g. recessions in important trading countries which had negative effects on German exports. But without doubt the decisive impulse came from Gennan unification.20

In the cours~ of this transformation process Germany has exchanged the role of international investor for that of borrower. Aggregate savings have declined with the sudden growth in state fun4ing demand, especially with the gigantic payments for consumption into East Germany. The transfer of public resources from west to east will-following the deduction of revenues from the new states-;unount to about DM 138 billions this year, ignoring low-interest 10-ans-about DM 225 billions-illld the support payments by the Treuhandanstalt which expects to run a deficit in 1993 of nearly DM 38 billions. Payments from public budgets, mainly employed for consumer goals, amount to about 4.5 % of the West Gennan gross domestic product.

Germany requires great amounts of capital for economic expansion in East Gennany at the same time that the public sector is absorbing 90 % of domestic savings.

"The deficit in German monetary transactions thus reflects to a certain degree the foreign contribution to economic reconstruc­tion in East Germany. Since the backlog in demand is still enor­mous, this factor will continue to bulk large in Gennany's ba­lance of payments. ,,21

But it is noted that the deficit in balance of payments remains constant at about one percent of the GDP and that capital imports do not exceed this value.22

19wing at the Zermatt Symposium on Aug. 8, 1993, as reported in DeUlsche Bundesbank, Auszilge aus Presseartikein, No. 55, Aug. 11, 1993.

211ssing, op. cit.

22p..ess interview with the retiring president of the DeUlsche Bundesbank, Helmut Schlesinger, on Sept. 16, 1993, as reported in the Neue ZQrcher Zeitung, Sept. 18, 1993.

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2.3 The accusation that the German unification process was having a negative influence on European developments~ even on the world economy-aims directly at the interest rates in Germany and the monetary policy of the German Bundesbank.

"Due to German unification the interest level was higher not only in Germany but consequently also in its partner countries than would have been the case without the financing costs en­suing from unification."23

Without doubt the process of economic unification has had an impact on price and cost trends. The burden of high payments to East Germany on West German public budgets led in consequence to a rise in mid-1991 in indirect taxes and fees. Together with other forces raising prices this led in July 1991 to a jump in the consumer price index of more than 4 % per annum for the first time in eight years. This inflationary push was made possible by a glut of easy money in East Germany and by extensive purchases of foreign currency by the Bundesbank to shore up the other European currencies. In addition, hopes that wage negotiations would result in moderate in~ in 1991 were disappointed. The worsening price climate and the danger of an inflationary expectation led the Bundesbank in mid-August to take interest rate countermeasures. And as far as the accusation of a 'high interest rate policy' goes the following facts ought not be ignored: Since we have had to import foreign capital after unification, it will be absolutely necessary to maintain the trust of foreign investors in our currency. In addition, without a stable currency at home there can be no long term formation of money capital, which cannot be too high in view of the tasks awaiting us in the East. We are all the more dependent upon the maintainance of the mark's stability.

In the meantime the Bundesbank has been lowering the prime rate incremental­ly. On September 9, 1993 in a sixth step the central bank discount rate was reduced frOm 6.75 % to 6.25 %, the lending rate from 7.75 % to 7.25 % and the carrying-over transaction rate to 6.7 %. Also, the German Bundesbank can point to a steep decline in interest rates on the capital market, which at about six and a half percent are not higher than in 1989 despite inflation and are low in international comparison. However, it should not be overlooked that in Germany, in contrast to many other countries, long term interest rates are more relevant for investment 'activity than are short term rates. 24

2.4 The German high interest rate policy ensuing from unification has sometimes been said to be responsible for the European currency system crisis. But the real causes are much more fundamental. As early as 1989 the experts commission had noted,

23Monatsberichte der Deutschen Bundesbank, July 1992, pp. 23 f.

~ Tietmeyer, "Geldpolitik in Deutschland und Europa vor neuen Herausforderungen,· Deutsche Bundesbank. Auszilge aw Presseartikeln, No. 44, Frankfurt am Main, June 25, 1993.

"that a readjustment was long overdue (Annual Report 89, Sec. 419 ff.). Even then it was apparent that permanent and fixed exchange rates were not proper between countries whose fundamental economic data developed differently. ,,25

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When the devaluation of the Italian Lira on September 13, 1992 initiated the dissolution of the European Monetary System, experts realized that the major reason for this lay in a lack of convergency among the member nations. And as far as the most recent turbulences in the European Monetary System are concer­ned it is hardly fair to accuse the German Bundesbank of having caused them. The German Bundesbank is legally obliged especially to maintain price stability. But, as in the past, it has always made allowances for exchange rates. Thus, in setting its course on rate policy the effects on the European currency snake were never ignored. In July 1993 it expended some DM 60 billion in supporting other European currencies, in the main the French franc. The recent collapse of the European Mont1tary System was largely caused by a policy at loggerheads with market-economy rates, which refused to adjust exchange rates with unrealistic parities to existing market conditions.

At last, the broadening of the scope to a total of 30 % now offers the opportunity to countries with soft currencies of reducing their interest rates to boost business without having to go through painful devaluation procedures when the echange rates drop. In effect the exchange rates were given leave to float-of course, exactly the opposite of that which the supporters of the European Currency Union had been aiming at. By 1997, by 1999 at the very latest, the EC currencies are to be riveted to one another.26 In any case, everyone has now realized that market forces are stronger than any illusionary wishes.

In general, it must be concluded that German reunification has had an in­fluence on international as well as West European economic developments. But there is no reason to speak of disturbances caused by reunification. From a European point of view there is no reason to moan over costs which may have been caused without making allowances for the highly visible profits made. Europe has grown larger and more influential than would have been possible without German reunification. At any rate, the era of European division is past, in which Europe ended on the Elbe.

25Sachverstiindigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, Jahresgutachten 1992193, p. 137.

2~ans Martin Kolle, "Raus aus dem starren Korsett. Neue Konturen in dec eutopiiischen Wiihrnngs­landschaft,· Rheinischer Merkur. Aug. 6, 1993.

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3 The Influence of German Unity on Eastern Europe

In turning to the problem of the influence of Gennan Reunification on Eastern Europe, a series of factors seem to be significant. Primary is for me the com­prehensive demonstrative effect of the arduous build-up underway in the new states which ought to help to dispel unrealistic conceptions. At the same time the Central-Eastern European nations have been forced to realize that they must go through a fundamental change in economy and society, and that this structural reconstruction is tied to serious economic and social problems of transition. A few examples:

3.1 In Eastern Europe it has become clear in the course of the transfonnation process in the fonner GDR, how difficult the conversion from a system of centralized planning to that of a market economy is. Also, in this case it has been realized what it really means to have been living solely on capital-whether for infrastructure and environment, for capital endowment, for construction of living space, for energy or whatever. The results were wrong products, poor quality, lack of marketing, completely inadequate service, unnecessary jobs for the sake of full employment; run-down and uninhabitable buildings and tenements, inadequately equipped hospitals and nursing homes; completely outmoded and patch-work repaired rail, road and telephone systems, in which no new invest­ments had been made for decades and demand had totally outstripped supply; run­down sewage systems lacking modern purification facilities; a practically criminal negligence in environment protection and exploitation of natural resources with all the evil consequences for present and future generations.

With the implementation of the currency, economic and social union came the recognition of the real weaknesses in the GDR economy. And despite the obsolescence and mismanagment rampant here, the GDR was still the leading technological and economic power in the COMECON, the Council for Mutual Economic Assistance. The GDR was considered the best developed industrial country in the communist bloc, coupled with a correspondingly high level of income. Doubtless certain difficulties, which are causing so much trouble in Germany, will not be involved in the process of transforming politics, economy and society in Poland, the Baltic states, the Czech Republic, Slovakia and Hungary. These countries are not confronted by the task of combining two totally contrary economic and social systems with highly different standards of living under one constitutional system under conditions of democratic equality. On the other hand, the East European nations on the whole are proceding from a far less favorable starting point than the fonner GDR which also has the advantage of being able to draw on the financial resources of West Gennany.

3.2 The process of Gennan unification has demonstrated that the development of a market economy system presupposes the existence of intact and functioning governmental institutions, especially a market economy oriented central bank,

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which makes its own policy, a system of business banks, operating independently of the central bank, an efficient revenue system and land registry and a courts system that is dedicated to the rule of law. On the whole, the present phase of transformation in Eastern Europe is characterized by high inflation rates and increasing levels of unemployment without any indication of a fundamental recovery and a strengthening of economic growth. But without a minimum of monetary stability these cannot be expected. Only in Poland, the Czech Republic and Hungary do sinking inflation rates provide a first indication of a continued recovery.

In 1992 the price level in Russia had increased more than twentyfold over the previous year. It should come as no surprise when the reform process runs down. The exchange rates falling under inflationary pressure promote capital flight, foreign concerns hesitate to invest directly. Apart from this, the inflationary climate is creating a explosive situation in the social fabric of the nation, which can endanger the political transformation. It has already been realized that creating a certain monetary stability is absolutely necessary for continuing the transformation process. But as a result of the ongoing power struggle between President Yeltsin and the Russian Duma, even basic reforms are not being implemented. Poland, the Czech Republic and Hungary were in a far better position to fight inflation. They disposed better of the institutional prerequisites mention above for an adequate monetary and credit policy and also managed their finance policy accordingly.

3.3 Germany's reunification and its transformation process have caused the Eastern European nations to study the major reasons for Germany's economic success. Attention has been directed toward Ludwig Erhard's economic policy, the implementation of a market economy system, the rise and consolidation of competitive structures, the concept of social market economy, the successive setting up of a workable economic and social system. Discussions are going on about legal frameworks as the basis for market economy processes. The change over to free trade relations is being studied, the way the old Federal RepUblic went a short time following the successful monetary and economic reform in 1948. Finally, the importance of financial stability is being realized, though the power is often lacking to enforce it.

At any rate we can note that in the Baltic states, in the former Soviet states as well as in Yugoslavia, Roumania and Bulgaria it is especially the D-Mark which is highly popular and is more and more taking over the role of a parallel currency.

3.4 We shouldn't ignore the fact that apart from the material difficulties involved in the change-over, there are a number of social and psychological problems demanding attention. The accustomed authoritarian social order which offered a secure place in society to conformist personalities was of necessity doomed. The new order placed a premium on initiative, flexibility and personal responsibility.

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It is obvious that especially the older generation has problems in adjusting to the new conditions, in particular since it is also hard hit by unemployment. In Eastern Europe increasing attention is being paid to this consequential change in behavior and economic reaction and is seen as a central element in the trans­formation. But it is also clear that people cannot change themselves in an instant.

German unity has had more effect than just as a demonstration object. Two facts need to be especially emphasized: 1) By now, massive support for the Eastern European transformation has set in. Following the collapse of the old order, many fundamental prerequisites for the expansion of market economy forces are lacking. Consequently, there is the urgent necessity to provide aid for humanitarian reasons, but also in our own interest.

"However, this cannot absolve the refonn states from making their own comprehensive and sustained efforts. The task of the international community is to support this self-reliance. At first, technical consultation, training assistance and relief measures for the needy must be the major efforts. Afterwards, when the refonn process starts to show results, official capital assistance and temporary balance of payment credits can play a greater role. The recipients themselves must take care, on behalf of their own long tenn credit reliability, that the financial aid does not flow into a 'bottomless well'. ,,27

Out of a total of $ 7.5 billion in new loans disbursed in 1992 by the International Monetary Fund (IMP), $ 1.7 billion went to the East European refonn states. The IMF was also involved in an assistance program for Russia by the G-7 states announced in early 1992, totaling $ 24 billion. Not surprisingly, the internal strife in Russia led to a delay in implementing this program.

Even before the outbreak of general political disorder the World Bank was active in Eastern Europe, according to membership date of each country. Russia first received financial assistance from the World Bank in 1992. At the end of fiscal year 1992 the credit commitments to Hungary totaled $ 2.9 billion and to Poland $ 2.6 billion.

The European Bank for Reconstruction and Development founded in 1990 has provided the East European refonn states with technical and financial assistance, which according to the bank's statutes are mainly meant to aid projects for the de­velopment of the private sector. By the end of 1992 credit and investments amounting to ECU 1.77 billion ($ 2.1 billion) had been allocated. Apart from this other investors had made financial commitments. It ought to be noted that the European Union has also given humanitarian assistance.

It should be emphasized that the lion's share of official aid to the refonn states up to now has been provided by Gennany.

27Deutsche Bundesbank, Geschiiftsbericht 1992, p. 93.

"If we add up technical support, humanitarian measures and diverse financial assistance, the bilateral Gennan payments (including present and future obligations) since the beginning of 1990 amount to DM 113 billion. Gennany has probably assu­med the greatest portion of all Western aid for the refonn states. With respect to the successor states of the Soviet Union the Gennan share is clearly more than 50 %. ,,28

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2) Broad patterns of cooperation between Western and Eastern Europe are not merely subjects of academic discussion. Efforts are being made to implement them. A good example is the endeavor to create a hanseatic region "Balticum. "29

It is intended to provide a future European perspective for the peoples of Estonia, Latvia, Lithuania and the Kaliningrad/Konigsberg region. This hanseatic region has engendered interest not only in Western but also in Northern Europe: in Finland, Sweden, Norway and Denmark. Within the context of this project the cities of Kaliningrad, Klaipeda, Riga and Tallinn would be built up as free ports. The present rail network connecting the Baltic nations, the Kalinin­grad/Konigsberg region and Western and Northern Europe would be modernized and expanded. A six-lane Autobahn would be built from Hamburg to st. Petersburg and Finland, via Danzig, KaliningradlKonigsberg and Tallinn, by an international consortium. This Hansa-Autobahn would facilitate freight and in­dividual traffic between East and West. In this way would the Eastern and Western parts of our common Europe be joined after 46 years of division.

The economic advisors of Estonia, Latvia, Lithuania and the Kaliningrad region appointed by the governments and parliaments are supposed to constitute shortly a Hanseatic Council Balticum. Of course, it is realized that one or another of these four regions will not find it so easy to implement this project for domestic political reasons. In such a case, the others would procede alone. The project of a hanseatic region is not to be delayed by the hesitation of individual regions.

In order to implement this broad project, of course, details have already been worked out on constitutional and legal structures, solutions to minority problems, monetary problems, the setting up of trustee institutions for privatizing state finns, building up industrial, trade and crafts chambers, etc. This is not the place to exaInine them' in detail, since it was my intention to show how the end of Gennany's division has led to the growth of new structures, lessening or even overcoming the gaps between Western and Eastern Europe. Suffice to note that the Baltic region had always been a bridge between Russia and Europe.

280p. cit., p. 98.

29Cf. the study Hanseregion Baitikum, report by the International Study Group, on behalf of the Council of Estonia (Eesti Komitee).

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4 Eliminating the Division of Europe

The end of the Gennan division was also the end of Europe's division and at the same time a shift in the center of gravity. The establishment of German unity shifted Europe's political center a good ways to the east. 30 The Europe of today and tomorrow is not identical with the old EC or the present EU, which "can no longer be considered the exclusive representative of that which is understood to be Europe. 1131

It was the abrupt changes of system in Poland, Czechoslovakia and Hungary, together with the unification process in Germany, that contributed to the elimina­tion of Europe's division. Poland is now a direct neighbor of the EU. Czechoslo­vakia-the present Czech Republic and Slovakia-has now twice the length of border to the EU. Hungary, which even under communist rule never denied its ties to the West, is now shaping them according to its own gusto. The Baltic states are ,making the most of the opportunity to orient themselves to the West. The liberated peoples of Eastern Europe were always aware of their European heritage. It would be a grotesque paradox if, now that the Iron Curtain has fallen, we were to erect a new wall to keep them out of the EU.

It may be argued that the EC had already concluded association agreements on December 1, 1991 with Poland, Hungary and the Czecho-Slovakian Federation32 .

and further that a partnership and cooperation agreement is under negotiation with the Russian Federation. Agreements like these help lito show good will, II but in fact they "tend to restrain access to the EC-market for the ex-communist nations rather than opening it. 1133 Thus, these agreements form only a very modest contribution to a concept for all of Europe which is now necessary. The EC in its eager efforts to deepen the degree of integration in Europe seems to have forgotten or ignored the fact that with the collapse of the communist system Europe has grown broader. We need therefore a new and comprehensive European policy in the sense of an all-European architecture, aiming at a

30Kurt H. Biedenkopf. "Das zusammenwachsende Deutschland: Chancen fUr Europa." Die StuTlde der Okonomen - Prioritiiten nach der Wahl in der DDR uTld die Zukunft der Europiiischen Wirtschafts­beziehungen. Hanus Martin Schleyer Stiftung. Essen 1990. pp. 102 f.

31Watrin• "Europas ungekliirte Ordnungsfragen," op. cit., p. 169.

31fie EC signed on Oct. 4, 1993 two association agreements with the Czech RepUblic and Slovakia largely in line with the association agreement which was concluded two weeks prior to the separation of the Czech Republic and Slovakia.

3lwatrin, "Europas ungekliirte Ordnungsfragen," op. cit., p. 188.

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community of responsibility for all of Europe. 34

In an interview on the turbulence in the European Monetary System Rudiger Dornbusch of MIT noted, "Poles and Czechs are more important than the Portugese for the Germans. It's anachronistic at present to work toward a monetary union with Portugal but not with Poland. ,,35 We should further not forget that the EC in the long run was the "result of a historical constellation," in which one major factor was the split between East and West, i. e. the cold war. 36

"There is no valid reason for letting the eastern neighbors, maltreated by history, wait in the antechamber or permanently consigning them second class status. "37

The European Bank for Reconstruction and Development made note on September 21, 1993 of the considerable adjustment difficulties in Eastern Europe.

"However, growth in the East European nations is also being throttled by massive restrictions in their exports to Western nations. Thus, exports by East European states are repeatedly impeded by new anti-dumping measures and trade barriers in the Western countries. This accusation refers especially to so­called 'sensitive' exports, agricultural produce, textiles, steel and chemical products. "38

At any rate the European Bank sharply criticized the practise of the EU toward the East European nations. With the end of communist rule in East Europe all of Europe-East as well as West-ought to heed only those principles which in the long run will lead to a free Europe: democracy instead of dictatorship, free markets instead of inverventionism, subsidiarity and variety instead of centralism, self-initiative coupled with self-reliance instead of demanding state coddling.

At the Paris CSCE summit on November 21, 1990, the 34 signatory states formulated in their historic communique, the Charta/or a New Europe, the goals for the "new great house of Europe" so:

"Europe is liberating itself from the heritage of the past. Through the courage of men and women, the strength of will of the peoples and the power of the concepts of the Helsinki final

34For a fuller treatme,nt of this question see Hans-HennaDll Hohmann, Christian Meier and Heinz Timmermann, Auf dem Weg zu neuen gesamteuropiiischen Strukturen? Die Europiiische Gemein­schaft, Ru'p/and und die GUS, in the series Berichte des Bundesinstituts rur ostwissenschaftliche und internationale Studien, (Cologne), No. 49-1992.

35"Wir brauchen die Spekulanten. Interview mit Riidiger Dornbusch," Der Spiegel, Aug. 9, 1993, in Deutsche Bundesbank. Auszuge aus Presseartikeln, No. 55, Aug. 11, 1993.

3~orbert Kloten, Europiiische Perspektiven nach Maastricht, Europa-Archiv, Nos. 13-14, Bonn 1993.

3S"Handelshemmnisse gegeniiber osteuropiiischen Landern kritisiert," FAZ, Sept. 22, 1993.

128

agreement a new age of democracy, peace and unity is breaking out in Europe. n

It may be felt that this euphoric declaration underestimates the difficulties which are still to be surmounted in the transformation of a no longer divided Europe. In addition, this declaration admonishes the European Union in effect to stay open. But one thing is certain. The march in Central and Eastern Europe toward liberty, democracy and market economy is now irreversible.

129

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Effects of Growing Economic Integration in East Asia on Japan 9 s Economy

Wolfgang IOcnncr!

1 Introduction

The rapid grow.th of trade and capital flows observable in East and South-East Asia can be explained economically as a catching-up process, because economic mechanisms which had long been hindered or even stopped by an arbitrary segmentation caused by political borders, ccase-fire lines, even overt military conflicts and ideological fire-breaks are now able to become effective gradually.

It is even possible that those foreign economic relationships may thus be restored-though on a completely different level-, which existed in East and South-East Asia before the region was finally fragmented into spheres of interest by European merchants, politicians, war lords and ideologists. Contrary to a common assumption in the West, free trade ideals were not at all the only Western transfers but also its opposite, mercantilism, which held sway in individual regions of the world economy longer and more intensive than liberal principles.

The present investigation, however, concentrates only upon the integration tendencies occurring in East and South-East Asia in the last two decades and their effects on Japan's economy. Section 2 comprises a brief definition of the concept of integration, on which this investigation is based, a general comparison of integration tendencies in East and South-East Asia with similar ones in Western and Eastern Europe, and turns to integration processes in select regions in East and South-East Asia. These consist of the "Chinese" region China - Hong Kong - Taiwan, then South Korea - China, and finally the entire region including Japan.

Section 3 is concerned with the effects of this integration on Japan. Among these are welfare related effects, repercussions for Japan's economic position in East and South-East Asia, especially with regard to its future relations with China, consequences for the future regional role of the yen (yen-bloc) and for select Japanese structures.

IProfessor of East-Asian Economics, Ruhr-University Bochum.

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2 Integration Zones in East and South-East Asia

2.1 The Concept of Integration

In the following the concept of integration is used to mean the growing economic interlinking among several national economies. This definition diverges from the integration concept current in the Western European discussion which includes such measures as a customs union, the adjustment of national economic policy to each other and, eventually, a political union. Interlinking refers to the creation of a fabric of transfers of goods and services, labor, land (either as property or usufruct) and capital as well as the adjustment of exchange rate policies among one another.

2.2 Comparison of Integration Processes in ~ and South-East Asia and Europe

The economic integration in East and South-East Asia had long been observed by Western regional experts, though not by the general public. This has now changed, and it is even frequently assumed that the economic region East Asia is a monolithic bloc; a view that overlooks the economic and social disparities that still exist in the region.

As to regards to the degree of integration, Western Europe, where national borders have hardly any meaning anymore for the transfer of goods and services, capital, labor and land ownership, is far in advance of the East and South-East Asian region, where goods and services are still subject to considerable re­strictions. Even among Japan and the Asian NIEs (South Korea, Taiwan, Singapore ~d Hong Kong) there are great barriers still standing. For example, in the early 1990s it was still impossible for South Korean enterprises to legally import certain Japanese state-of-the-art electronic consumer goods. Capital movements' are still frequently regulated. The intraregional mobility of manpower is officially largely prohibited, the acquisition of land by purchase or usufruct severely limited. The experiences-both positive and negative-gamered in the European integration process can help us to better appreciate the possible consequences of further integration steps in East and South-East Asia.

However, the picture is quite different when a comparison with Europe includes Eastern Europe. Much that is considered desirable for the integration of Europe as a whole, but has not even begun to be realized, is already reality in East and South-East Asia. The orderly transformation of the system in China and Vietnam, no matter how problematical in detail, is encouraging foreign business partners to do business with and invest in them. The results are extraordinarily high growth rates in the domestic product and in the foreign trade of these nations. In contrast, the system transformation in many East European states has resulted in growth crashes comparable to the great economic depression. This has kept many Western partners from starting up and intensifying business with

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Eastern Europe. Apart from Japanese enterprises, South Korean and Taiwanese enterprises are

major players in regional and even international business. Thus, South Korean large enterprise, the chaebols, have established themselves on the markets in South-East Asia and China, but also elsewhere in the world. Comparable successes by East European firms on international markets are not to be found, even though many flrms have highly qualified staffs.

Further, certain regions in Asia; which for reasons of foreign trade were granted a special status (e.g. Shenzhen or Xiamen in China), have grown into centers of international business and investment, and show especially high growth rates. Corresponding plans for Eastern Europe, e.g. St. Petersburg, Konigsberg (Kalinengrad) or the Baltic region, have still not progressed beyond the dream stage. In this respect, East and South-East Asia may well serve European businessmen and politicians as examples.

2.3 Interlacing Processes in Select Regions Outside Japan

Outside Japan a rapidly growing economic interlacing occurred between China, Hong Kong and Taiwan, as well as more recently between China and South Korea.

2.3.1 China - Hong Kong - Taiwan

China was able to reduce specific development bottlenecks, resulting from its previous development policy, by cooperating economically with Hong Kong, and later with Taiwan. Until the late 19708, China had set its highest development priorities on heavy industry. The consumer goods industry and services-banks, hotels, restaurants and insurance--bad been only slightly or not at all developed. In addition, the whole orientation was toward the domestic market; practically no Chinese enterprise, not even the giant conglomerates had their own contacts to foreign markets. Accordingly, they had no insight into international market movements. Finally, China's currency was purely for domestic use.

By opening up to Hong Kong and Taiwan, not the l~t by setting up the so­called Special Economic Zones to the north of Hong Kong and westwards of Taiwan, China was able to make use of those opportunities where Hong Kong and Taiwan had comparative advantages.

Thus, Hong Kong possesses a highly developed light industry. It is a first class international services center and has excellent international relations, transport routes and means of communication and a relatively stable, fully convertible and internationally accepted currency. Hong Kong enterprises invested in manufacturing capacity in light industry and services. Their joint ventures and 100% subsidiary firms in China exploit the international contacts of the parent corporation to offer their products on the world market. The Hong Kong dollar is now circulating in south China and has pushed aside the non-convertible

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renminbi in many transactions governed by market processes. China's economic cooperation with Taiwanese business began rather hesitantly,

with mostly smaller firms working at first via Hong Kong in the light industry and services sector. Later, firms active in agrochemicals and certain branches of agricultural machinery invested in China, in order to produce nearest to their customers. Taiwanese corporations like Chinese Petroleum, Taiwan Power, Taiwan Telecommunications or the tobacco and wine monopoly, however, were reserved at first, officially at any rate, not in the least because most of them were still state-owned corporations (despite all plans to sell them off). But negotiations were already proceeding between Taiwan and China on the shared development of satellites and on depositing nuclear wastes from Taiwan in China's west.

In the meantime, Taiwan is doing some 10-20% of its foreign trade directly or indirectly with China. Taiwanese firms have invested 10 to 20 billion dollars (U.S.) in China. If Taiwan's large corporations should some day engage massively in China, then China would be able to profit, as it has not done from the Hong'Kong connection, from the advantages of a modem large-scale industri­al production.

2.3.2 South Korea - China

By establishing economic relations with South Korea (as a part of the mutual diplomatic recognition) China has taken up relations with a very special economic partner. South Korea's economy is dominated by conglomerates, the chaebols, whose production areas lie in the sectors of heavy industry, light industry and services. Some of these chaebols are among the fifty largest corporations worldwide, e.g. Samsung and Hyundai.

In certain sectors these are internationally successful, in others they are clearly weaker than their Western competitors. In both cases China will be able to profit from cooperation: By cooperating in competitive sectors Chinese firms can gain access to modem processes and organizational methods~though Korean corpora­tions arc probably less interested in an intensive transfer of know-how. In less competitive fields, the interest of Korean enterprise in an intensive transfer of know-how with Chinese enterprise, aiming at garnering competitive advantages for both sides, could be especially high.

In this manner China would be enabled to modernize its heavy industry sector, which is of course impressive in its huge production capacity, but trails badly in productivity and quality. Another advantage for China results from the specific regional center of gravity of Korean trading and investment activities. They lie especially in China's north-cast, whereas Hong Kong and Taiwanese firms arc concentrating on China's south and south-east.

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2.4 Linkage Developments between Japan - NIEs - ASEAN and China' s Coastal Provinces - Indochina and China' s Inland Provinces

In order to register comprehensively Japan's economic relations with all other East and South-East Asian economies, it is convenient to structure them by rcgions. Thus we have a scale of four countries or regions with differing levels of development:

Japan itself; the NIEs; ASEAN and China's scaboard provinces; and Indochina and China's inland provinces.

Economic growth in these countries and regions is certainly due in large part to suitable economic and social structures and proper economic policy decisions. But without doubt, their opening up to foreign trade was also highly important.

If we observe the development of their foreign economic relations in con­junction with that of their domestic product, it is not difficult to note delayed spill-over effects: Following the Second World War it is first Japan which gains the decisive growth impulses from its close economic relations with the USA. Later, it was the trade with Japan and~specially after the appreciation of the yen resulting from the Plaza Agreement in 1985-Japanese direct investment in the present NIEs which started their rapid growth.

With growing development level the latter expanded their trade with neighbo­ring economies and were themselves soon able to export capital. They invested mainly in those countries and regions, where wages were low as compared to their domestic wages, which by now had grown considerably: in ASEAN and in China's seaboard provinces, following China's foreign trade opening. Just as Japan had previously exported relatively labor-intensive technologies, now corporations in the NIEs transferred less productive production lines to countries and regions with lower production costs.

At the present time, corporations not only in Japan and the NIEs but also from the ASEAN and China's coastal provinces are on the lookout for low-cost production sites in Indochina and in China's inland provinces where they can invest. It is becoming clear that these will form the fpurth group in East and South-East Asia to profit from the growing intraregional economic relations.

This process of a successive spread of development impulses to new regions in East and South-East Asia with at first relatively low wage levels has been tentatively explained in foreign trade theory by means of product cycles, inno­vation head starts and other factors. It was vividly described by Akamatsu Kaname as theflying geese concept (ganko keitai hatten ron? and introduced into the international discussion by Saburo Okita and IGyoshi Kojima.

1be flying geese concept takes its name from the V ·formation, with one leader and followers in a stepped formation. According to this general principle of development, less advanced countries adopt the industries of advanced countries and pursue them along the road to development.

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3 Measurable Effects on Japan

As a result of the growing integration in the East and South-East Asian region, domestic product and welfare, the economic status of these affected nations in the region and in the world, the importance of their national currencies and important economic and social structures have all been dramatically altered. This section attempts to describe some of the effects on Japan.

3.1 Free Trade, Controlled Trade and Welfare

The rapid growth of trade and eapital currents observable in East and South-East Asia can be explained economically as a catching-up process, because economic mechanisms which had long been hindered or even stopped by an arbitrary segmentation caused by political borders, cease-fire lines, even overt military conflicts ~d ideological fire-breaks are now able to become effective gradually. It is not difficult to realize that all those mechanisms analysed in international economics as the cause for economic exchange-productivity variations due to natural causes, economics of scale, differing demand structures, technological leads, differing positions in the product cycle of important goods, etc.-have led to the belief that East and South-East Asia is moving toward a situation which in the view of international economics is the "normal" one. Therefore, we are not surprised that the many positive effects ascribed to international trade on domestic product and welfare by economics theory arc observable in Japan.

But this discovery is quite trivial, because two extreme situations are implicitly being compared-Japan with, and Japan without foreign trade. For example, Japan is doubtlessly in a better situation when it imports the oil it needs from Indonesia and satisfies its consumers now in diseount stores with cheap and qUalitatively improving products from Korea, China or Indonesia and can run its steel mills to full capacity by exporting steel to China, than if it was without these foreign trade contacts.

An estimation becomes more difficult if we take the fact into account that easing or eliminating foreign trade barriers in East and South-East Asia seldom meant creating those conditions which are presupposed in theoretical frec trade sCenarios. m Japan, for example, in many fields the predominant market form is the broad oligopoly-foreign trade activity is the prerogative of large corpora­tions, which were no doubt largely influenced by MITI in the early post-war period. In South Korea, foreign trade activity by the powerful conglomerates was massively promoted through state disbursement of foreign exchange, capital and other assistance. In Taiwan, the economy and foreign trade are still dominated by mixed state/private corporations. In China, the relatively small joint ventures operated together with foreign partners take a large share of foreign trade, about 25 %. The great state enterprises with hundreds of thousand employees are still relatively inefficient and inexperienced in international market affairs. That could, with the influence of Japanese, Taiwanese and South Korean investors, changc

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very rapidly. The day is soon approaching when mammoth Chinese corporations, subsidized via an invisible network by central and local state institutions, will have a very considerable impact on regional Asian and international markets.

Specific market structures and behavior patterns as well as in part massive government intervention in the economy lead us to the conclusion that foreign trade processes in East and South-East Asia are highly distorted, from a frce trade view. Now theoretical calculations have suggested that deviations from free trade conditions do not necessarily lead to welfare losses, that in certain cases they can even be desirable. Under very special conditions, e.g. economies of scale, where the advantage is always with those who arc the first to set up the greatest produc­tion capacity in "good" industry, i.e. industry with a promising future, when external costs and advantages are available, precisc1y defined state intervention can be justified.

Problems of this kind have up to now only been discussed in the bilateral relationship be.tween the USA and Japan-though mainly in the political field. The result seems to be that now even in the USA the government wants to intervene directly in foreign trade aspects of the economy. However, this posture is rarely based on economic analysis. Many questions are still open, and not all rc1evant factors have becn taken into account.

It is even complexer and accordingly more difficult to analyse the rc1ationship of the East and South-East Asian economics to one another, in which, at least in the past, the degree of government influence on foreign trade was far larger than in the relationship USA/Japan. Aecording to politieal statements, but also going by measures already taken, we ean sec that Japan really intends to gradually liberalize further its services and agricultural sectors and adhere more closely to the principles of free trade; the same is valid for Taiwan and its large state enterprises, for South Korea and its rigid corporate megastructures and for China and its entire economy. This is not happening because they have suddenly become apostles of frec trade, but out of the recognition that--compared to their previous foreign trade behavior-greater welfare benefits for their economies can be achieved.

3.2 Japan's Economic Status

Within the East and South-East Asian region only Japan has achieved the status of a leading international economic power. We must now ask if this prominent status is endangered by deVelopments in the Asian region or, to the contrary, amplified.

As we see things today, Japan's present status can be affected by developments in the NIBs and China.

In the NIBs the growth rates in domestic product will probably continue to be higher than in Japan. In this context, it may be assumed that some of the NIBs, successful enough up to now, will also manage the quantum jump in future­oriented technologies and by cooperating with foreign countries, also with firms

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in China, Indochina and former Soviet states, achieve a cost advantage. We can assume that the development gap between Japan and the NIBs will gradually become smaller.

Of course, economic dynamics in Japan's neighbors should not be to Japan's disadvantage. On the contrary, it is far more likely that Japanese companies will gain and be induced to improve their market performance. It should also be noted that while individual corporations from the NIEs are highly prominent on international markets, it shouldn't be forgotten that per capita income in the NIBs is not much higher than in Portugal or Greece, and that all together they only add up to some 70 million persons-widely distributed over a large area. Their effect on Japan, the Asian region and the world will probably not come close to the dimensions of the "Japanese challenge."

The economic growing up of China could be far more important to Japan. In this context it is probably important to note that according to calculations by international organizations-after taking purchasing power parities into ac­count~hina's social product has already caught up with or even exceeded Japan's social product. What is really more important, however, is the fact that individual Chinese provinces, each nearly as populous as Japan, have had great success in their economic development and, with the help of foreign investment, have moved into certain high tech areas.

This situation creates demand effects and cooperation opportunities for Japan which are fundamentally advantageous to both sides. However, the central statist clinch on Chinese enterprise could prove problematic for Japan's position. China could find itself in the position to target its economic actions, and might be able to challenge Japan's leadership in certain fields. Japan's business and politics, which only slowly and under pressure from abroad accepted the role of a leading economic power-together with the USA and the EC-, would suddenly be forced to face a completely new situation. Japan and China would form a sort of dipole in East and South-East Asia.

This constellation could also be profitable for Japan. In view of Japan's predominance in technology and business, many potential partners in Asia are afraid of entering into a too close a relationship with Japan. Because they do not want to become dependent on the sole Asiatic" giant," they possibly forgo certain advantageous deals. A restrengthened China could help to ease this situation not only because a dependency upon Japan could be lessened through close economic contacts with China, but also, vice versa, dependence on China could be balanced by strengthening relations to Japan.

3.3 The Regional Importance of the Yen

The question now arises, in the context of intensive intraregional economic relations and Japan's economic dominance, as to whether Japan's currency will assume a larger role in the East and South-East Asian region. The result of corresponding monetary policy steps of a "yen-bloc" constituting itself around

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Japan could be that the member economies link up their national currencies with the yen, i.e. the parities to the yen are held constant, whereas they would float in relation to other currencies, including the U.S. dollar.

Up until now, monetary policy in most East and South-East Asian countries has been oriented on the U.S. dollar; their currencies swung only slightly against the dollar, relatively more so against the yen. Accordingly, the dollar is still extraordinarily important as a commercial and reserve currency. For example, South Korea based some 80% of its foreign trade in 1990 on the dollar, only 10% on the yen. Even Japanese corporations bill mainly in dollars; for example, Japan's petroleum and other raw materials imports are conducted almost wholly on a dollar basis. Only in the field of intraregional debts does the yen have a major role. A large portion of the credits, especially those granted at special rates within the context of development aid, are conducted on a yen basis, mainly because Japan is the major source of credit in the region.

The emerge.nce of a yen-bloc depends, of course, on the interests of the participants. Japan long shied away from an international role for the yen. It was feared that domestic targets, especially price level stability, could no longer be enforced if the yen was employed outside Japan. Also, further appreciation tendencies of the yen were to be avoided, so as not to further weaken Japan's export potential which would have resulted from a growing international demand for yen as soon as it had an international role to play.

In the meantime, the advantages of having the yen as an international currency have been recognized in Japan. Japanese businessmen would not have to hedge exchange rate fluctuations if they could bill in yen and not dollar. Capital export on a yen basis instead of a dollar basis would no longer entail losses due to a dollar devaluation. And finally, Tokyo would become more attractive as an international financial center.

The interests of Japan's Asian partners are much more varied. Those nations which compete with Japanese firms in certain fields, South Korea, Taiwan, Singapore and Hong Kong, may be able to stabilize their economy by linking their currency closely to the yen. The present linkage to the U.S. dollar results, when the yen appreciates against the dollar, in an expansion effect, since real wages measured in yen sink. Should the yen fall, their export opportunities will shrink and domestic business drops. Countries like ASEAN, which export raw materials to Japan or have accumulated a large debt in business with Japan, are faced by other prospects.

Thus, much depends on each individual production and foreign trade structure, the goals of economic policy and the specific debt structures. However, if the interests of the involved nations should coincide, and they decide to link their currencies more closely with the yen and less on the U.S. dollar, the swings up and down of the currencies in East and South-East Asia would lessen. Quite likely, the yen would increasingly be employed as a commercial and reserve currency.

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3.4 Effects on Select Japanese structures

Growing economic integration is affecting many economic and social structures in Japan. The following lists some of the effects already tangible on the Japanese corporate sector. - Japanese firms are opening up additional markets, for less qualitative products as well. If they should succeed in opening up these markets, then they can exploit the economics of scale in mass production and operate with even more success on the Asian and international markets. - Competition is growing on the Asian markets, even in Japan itself. This will spur many firms to increase their investments in future-oriented technologies, which, of course, will benefit Japan's competitive forces. - Increasing competition could speed up the process of concentration. Whether this would make corporations more efficient and heighten productivity, marketing and research is doubtful. MITI now apparently thinks so, when it recommends fu­sions in the artificial fiber industry. In any case it is important that access to the market for new producers and that the activities of small but dynamic firms are not hindered. Japan's own experience has demonstrated the importance of these competitive forces. Thus, by no means all of the present mega-corporations are successors to the zaibatsus: Honda started as a small repair-shop for motorcycles and Matsushita was a nonentity supplier of electronic components. - Japanese corporations will likely increase the export of labor-intensive production fields and produce abroad. The leeway remaining to Japanese firms for internationalizing their production can be assessed by remembering that at the end of 1991 only about 9% of Japan's production capacity was abroad; the corre­sponding share of the USA amounted to two or three times this. It may be expected that Japanese corporations will accelerate the build-up of new productive capacity in the Asiatic region. Up to now, Japanese entrepreneurs have concen­trated their direct investment activities on North America and Western Europe. The results, 'however, were in part very problematical. Investments made in the Asiatic region, on the other hand, generally showed a profit after only two years. - The growing transfer of capital can, of course, also lead to those effects which were already under discussion four or five years ago: kudoka or undermining the ecOnomy, leading to job losses, etc. Whether Japanese corporations will continue to be able, in this situation, to guarantee a life-long employment to some of the staff, is doubtful. Likewise, Japan's keiretsu-system may have reached a dead­end. Instead of buying additional stock in certain Japanese corporations, it could be more profitable to employ this capital to set up new enterprises in China or Korea. Instead of drawing certain components or other services from one's own keiretsu-system, it may be more cost-effective to establish contacts to Korean or Chinese producers and to enter into business with them.

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