The influence of German unification

Germany was reunified. Behind this inevitable unification, there are many problems about the economic consequences at home and abroad. In order to clearly understand these consequences, it will be beneficial to study these problems within a specific quantitative analysis framework. Recently, the International Monetary Fund conducted a study (see the column on publications), and this paper briefly introduces the results of the study. The conclusion is that the road taken by East Germany has a great influence on the unified German economy, but the international influence of reunification may be moderate.

Change the economy of East Germany

In the next 10 year, will there be a new economic miracle in the economic evolution of East Germany, or will there be another regional problem in Europe? In many ways, the prognosis diagnosis result is good. For example, the savings balance in West Germany is a ready-made source to increase the investment demand in East Germany. Moreover, although the eastern part of this country has been suppressed by the central planning system for a long time, it may soon return to the enterprise level before World War II. However, the capital of East Germany is poor, and it will take some time to support East Germany to realize the wage level of West Germany. Obviously, this will cause pressure: the slow process of eliminating the income gap between East Germany and West Germany will lead most skilled workers to emigrate to West Germany, but narrowing the gap too early will not encourage investment; Either way, it may endanger the economic recovery process in East Germany. In order to analyze these problems, the staff of the International Monetary Fund compiled a detailed macroeconomic model of East Germany (see the column on the model). Some big uncertainties cover up the original conditions of East Germany, the possible reaction of foreign investors, the expected immigration pattern, the ability of East Germany to absorb large-scale investment (especially in the first few years after reunification) and the policy and institutional framework. Therefore, the prospect scheme formed by this model is not certain to happen, but shows the possible development under the premise of careful choice. Based on the economic outline of East Germany in the second half of 1990, they assumed that the labor productivity of East Germany was about 30% of that of West Germany before reunification. In the next 10 year, the level of economic growth required for China and East Germany to narrow the productivity gap depends not only on the initial gap, but also on the growth of labor productivity in West Germany. The prospect assumes that the labor productivity in West Germany will increase by about 2.5% every year, or decrease from 1990 1/3 to 200 1. Assuming that the labor force in East Germany decreases by 65,438+00% (due to low immigration and labor participation rate), in order to raise the productivity of East Germany to the level of West Germany by 2006, the output of East Germany will increase by 65,438+03% every year. In the use of capital and labor, eliminating inefficiency plays an important role in improving the growth rate. However, even though the income from newly issued stocks in East Germany may make up for the growth rate, the accumulated net investment during the period of 199 1-2000 still needs about10.8 trillion Deutsche Mark (calculated at the price of 1990), which is almost equal to the net national product of West Germany. A less ambitious goal may be to reach 80% of West Germany's productivity level by 200 1. This may make the productivity gap close to the gap between the three poorest States and the eight more prosperous States in West Germany. This also requires a cumulative net investment of 1. 1 trillion Deutsche Mark, and the average output growth rate reaches 10.5%, which is still a rather arduous goal. Scheme A is the more optimistic of the two schemes discussed here, which meets the latter goal (see figure). Although the unemployment rate was high at the beginning-1991year, and the number of unemployed people accounted for1/4 of the labor force-the rate of decline was also very fast, and it was the same as the assumed level (6%) in West Germany by the end of this plan. The average total investment of1991-1992 is very large, accounting for 43% of East Germany's GDP. All this requires foreign funding (including financial allocation from West Germany); Because the consumption of West Germany far exceeds the net output value, the total amount of foreign capital actually needed is about 150% of the net investment. During the whole period of1991-2001,3/4 of the net investment came from areas outside East Germany (including the financial allocation of West Germany). However, making such an estimate of foreign capital demand is subtle in the balance between financial allocation and other forms of external financing. The calculation here assumes that the current account deficit of the East German government is completely made up by the allocation of West Germany.

According to Scheme A, the goods and non-production factor services imported by East Germany were about 65,438+0,200-65,438+0,300 billion Deutsche Mark at the beginning, equivalent to 5% of the GNP of West Germany. As time goes on, these net imports decrease and are close to zero by 200 1. Part of the reason for this situation is the decline in investment demand related to output, but the more important reason is the increase in savings rate. Although private savings have increased, the strong position of foreign economy is mainly due to the improvement of government accounts. The overall government deficit in East Germany was very high in the early stage (accounting for almost half of East Germany's GDP 199 1), but then it decreased steadily, and a preliminary budget balance appeared in 2000. Scheme B (also marked on the map) is not very optimistic. By 200 1, the productivity of East Germany will be only 60% of that of West Germany, and a large number of people will be transferred from East Germany to West Germany. The investment level is lower than that of Scheme A, and the progress of reducing the ineffective use of labor and capital is slow, which makes the economic performance less stable. The net investment of1991-1992 is only 60% of that of Scheme A, and this relatively weak state will run through the whole scheme. This is due to the high wage demand and the weak economic structure, which aggravated investors' hesitation in the early stage. From the beginning, the problem of fiscal imbalance was more serious than that of Scheme A. On the one hand, the low growth rate restricted the increase of income, on the other hand, it increased the proportion of social expenditure to GDP, making the fiscal imbalance stubbornly high to 200 1, and the basic fiscal deficit in East Germany was about 9% of GDP. The accumulated deficit is large, which increases the interest expense. However, due to the assumption that there is a grant from West Germany, these interest expenses are recorded in the government accounts of West Germany. This kind of financial performance is reflected in the external account, and the deficit is much larger than scheme A.

World savings

In a world with great capital mobility, investment can open the door to the international savings pool, rather than being confined to the local capital market. A useful starting point to measure the impact of reunification on East Germany is to consider the extent to which global savings can be absorbed to increase investment and social spending in East Germany. The average net import demand of East Germany 1990- 1994 obtained by Scheme A and Scheme B is similar (with an average annual output of 60 billion US dollars)-the output figure of Scheme B is lower, but it offsets the lower demand in the same period. Compared with the world's savings of $4 trillion, the foreign capital required for these net import needs in East Germany is obviously very small-less than 2% of the world's total savings. An important question is to what extent the higher savings of West Germany, especially its higher output, can meet the demand of East Germany. This will depend on the supply capacity of West Germany, and the supply capacity will be affected by the growth of its labor force. The unification of Germany has re-created the free flow between East and West Germany. The resulting migration from East Germany to West Germany is expected to increase the total demand and supply in West Germany. In Scheme A, the net migration from East Germany to West Germany is assumed to be1320,000 in 1990, reduced to 70,000 in 1992, and 20,000 per year after 1993. As a result of immigration, by 200 1, the potential output of West Germany is expected to be 1.25% higher than that without immigration, provided that there is enough investment to maintain a certain capital-labor ratio. In Scheme B, the net number of immigrants of 1990- 199 1 is the same as that of Scheme A, but it is much higher than that of1992: 270,000 in that year, and will be reduced to 90,000 from 5,438+0 in 2006. This prompted the potential output of West Germany to increase by 3.5% in 200 1 year. However, in the first few years, after deducting the increased consumption of immigrants and the larger investment mentioned above, the increased potential output was relatively small compared with the foreign capital demand in East Germany. In this respect, the two schemes are the same.

Influence on Germany and abroad

In order to quantitatively express the influence of unification on areas outside East Germany, the International Monetary Fund's global macroeconomic model, that is, the "multinational model" (see the column explaining the model), takes various data such as East Germany's net import demand, financial imbalance and immigration as inputs, calculates various schemes, and compares them with the baseline that does not include the influence of national unification. From this, we can outline some main channels to spread these influences. After increasing the ratio of global investment to savings, the global real interest rate will rise, although the rate of increase varies from country to country. Part of the increased demand in East Germany was directed at goods from West Germany, which promoted the increase of West Germany's output. Compared with foreign goods, the price of German goods rose (the real exchange rate of the West German mark appreciated through higher prices and harder currency in Germany), which reduced the net export of Germany after reunification. The magnitude of these effects depends on many factors. For example, how will reunification affect Germany's macroeconomic policy behavior? Assume that the Bundesbank will continue to resist the pressure of excess demand as in the past; The tax rate remains unchanged; Make up for the increased budget deficit with government bonds. The utilization level of production capacity is also very important to inflation. In the "multinational model", production capacity is not an absolute constraint on output. On the contrary, the higher the capacity utilization rate, the greater the inflationary pressure brought by the increase in demand. In the simulation model proposed below, the starting point of production capacity utilization is very high, but it is still lower than the historical peaks reached in 1972- 1973 and 1979- 1980. In addition, as mentioned above, the further increase of immigrants from East Germany will often increase the output capacity. The initial pressure of West Germany's production capacity will also depend on the geographical distribution of East Germany's import demand. Suppose that 2/3 of the increase in demand first appears in the increased exports of West Germany, and the rest is shown in the exports of other countries (according to the historical import share of the Federal Republic of Germany). The assumed net import of East Germany is shown in the figure. In Scheme A, this simulation of demand leads to an increase of 0.6 percentage points in the growth rate of West Germany at 1990 and 199 1 .3 percentage points. In the next few years, the growth rate of output is slower than it should be, because the change rate of net imports from East Germany is negative, which is also the lag effect of rising interest rates and currency appreciation. However, due to the favorable supply effect, the output level of West Germany is still high, and the overall output growth of Germany is always tight (see table). However, the pressure of inflation is also great: the output price of 1990- 1992 rose 0.5 percentage points faster than the baseline on average.

In the exchange rate mechanism of the European monetary system, the output effect on other countries is negative, but the value is not large, while the output effect of non-exchange rate mechanism countries is slightly positive. Both groups of countries are affected by high interest rates to some extent. Due to the stability of the assumed central exchange rate parity, exchange rate mechanism countries also have real effective appreciation (just as their currencies appreciate against the US dollar and the Japanese yen together with the German mark), which, combined with the rise in interest rates, offsets the stimulus to Germany's strong export position. Generally speaking, Scheme A points out that the international influence of German unification is not very great, and the expansion of demand will not put the German production capacity under uncontrollable pressure. However, the increase of German government expenditure will increase the ratio of consolidated government debt to GDP 1999. After that, it tends to decline and return to the baseline level. Scheme B outlines a less favorable prospect for Germany as a whole, but not only for West Germany, because there are more immigrants from East Germany in West Germany to promote its output growth. Due to the increase of unemployment benefits, the slow growth of income, the slow growth of output in East Germany and the need to pay interest on accumulated debts, the combined fiscal balance is even worse in terms of its ratio to GNP. Therefore, the government debt exceeded the baseline in 1995, reaching 19% of the total GNP and 30% in 200 1 year. Nevertheless, the impact on financial markets and other countries is not much different from that of Scheme A, and the impact on inflation is similar.

Policy issues and uncertainties

The influence of German unification on German government deficit and debt is the main feature of current policy debate. In particular, the possibility that the government deficit will remain high for a long time (for example, from the above-mentioned less optimistic plan) has aroused many concerns. Everyone thinks that reducing the expenditure of West Germany, especially reducing the subsidy expenditure, is a desirable way to limit these deficits. However, it may be necessary to consider increasing taxes if the measures to cut expenses cannot achieve enough savings in the budget. As the income tax has been reformed recently, raising direct tax may have a negative impact. Raising the VAT rate seems to be a more desirable alternative, which is consistent with the government's goal of improving the efficiency of the tax system, and also helps to make the German VAT rate closer to the European average tax rate. Therefore, Scheme A is simulated by increasing the indirect tax revenue of 20 billion Deutsche Mark in 199 1 year in the "multinational model". This is equivalent to an increase of nearly 2 percentage points in the value-added tax rate in West Germany (a similar increase in the value-added tax rate in East Germany can increase the income of another 3 billion Deutsche marks). Suppose that the Bundesbank raises the monetary liquidity index in consideration of the initial impact of raising the indirect tax on prices, and the income thus increased will help to limit the medium-term impact of national unification on the budget: in this simulation, compared with the baseline, the comprehensive government debt ratio of Scheme A will not increase from 19 1 to 16% GNP, but will only increase by10. Simulated tax increase will lead to high inflation rate in a short time, and the increase of GNP deflator is faster than 199 1 (one percentage point higher than Scheme A) 1.7 percentage points. Since rising prices will cause people to worry that inflation will continue to rise, we should be cautious about raising indirect taxes. Option A assumes that the central parity of the exchange rate mechanism countries remains unchanged. This plan will slightly reduce the output of other countries with exchange rate mechanisms. This can be avoided by adjusting the exchange rate of their currency against the German mark. However, we should also consider the negative impact of the "hard currency" policy of the exchange rate mechanism countries-that is, the commitment of monetary policy to stabilize prices-on reliability. In particular, by tightening monetary policy and avoiding readjusting their exchange rates against the Deutsche Mark, other countries in the exchange rate mechanism have successfully reduced their inflation rates many times in recent years, bringing them close to the German level. The devaluation of their currency against the Deutsche Mark may arouse people's doubts about their anti-inflation commitment. The table shows the results of the scheme that the currencies of other exchange rate mechanisms in 199 1 depreciate (by 4%) against the Deutsche Mark, which makes people assume that the exchange rate will be further adjusted (assuming that the annual adjustment is equal to 1.5%), which will lead to higher inflation in the next few years. Other exchange rate mechanism countries have experienced higher inflation than Scheme A, but their output is also higher. The impact on Germany is only slightly different.

conclusion

There are some uncertain factors in the process of the transition from central planned economy to market economy in the former German Democratic Republic. The above model can only be regarded as a rough quantitative analysis of the possible impact of German reunification on other countries. In addition to the uncertainty of German economic policy and private and corporate behavior, there are other ongoing structural changes that can alleviate these results, including greater national economic integration combined with the European single market plan. The overall picture presented by various schemes is that the international influence of German unification is relatively moderate. In addition, these influences are not particularly sensitive to the success of the economic transformation process in East Germany. This is not surprising, because compared with global savings, East Germany needs relatively little money. However, the road taken by the East German economy in the next few years will have a great impact on the now unified Germany, and it can also provide some important lessons for other Eastern European countries. Special column

The model used in this study

The model experiment described in this paper is carried out according to the situation obtained in June of 1990+00, without combining the future economic development and policy forecast. Think of East Germany as an independent economy. For example, East Germany has a completely independent financial sector. Although this method does not conform to the institutional characteristics of Germany after reunification, it can help to analyze the various effects of reunification without causing any fundamental distortion. The two schemes of East Germany are based on a detailed model, which integrates the demand, supply and income of East Germany. This model was introduced in the 75th periodic report. In order to evaluate the impact of reunification on areas outside East Germany, the results of the East Germany Plan are used as external influences in the multinational model of the International Monetary Fund. The multinational model consists of several sub-models. The largest seven industrial countries are divided into seven groups (in which the German model is based on the data before the unification of the Federation and the country), other industrial countries are 1 group, and developing countries are divided into two groups according to the capital exporting countries and capital importing countries. This is introduced in Model Standard Ⅱ of Multinational Corporations. PaulMasson, stevensymansky and Guy Meredith wrote The Model of Economic Revision and Expansion. See IMF's occasional report No.71,published in July 1990.

A new publication about Germany

The International Monetary Fund publishes the 75th Irregular Report "German Unified Economy" at a price of $ 10 (see the back cover for the subscription notice). The development plans of East Germany outlined in this paper are based on Chapter IV "Investment Demand of East Germany" and Chapter V "East Germany: New Economic Miracle?" It's written The authors of these two chapters are DonoghMcDonald and GuntherThumann. The evaluation of the influence of West Germany and other countries in the world is based on Chapter VI "Domestic and International Macroeconomic Consequences of German Unification", which was written by PauMasson and Guy Meradth. The other nine chapters of the report cover many topics, including fiscal and monetary policies, the labor market, the behavior of savers and investors, and the challenges of institutional reform in East Germany.