Don't Repeat Germany's Mistakes, Academic Tells Korea

Korea should not follow the example of German reunification, a German academic has advised on the 20th anniversary of the fall of the Berlin Wall. Dr. Udo Ludwig, the head of the Macroeconomics Department at Halle Institute for Economic Research made the remarks in a recent interview.

"When my Korean friends ask me about economic reunification, I tell them to study Germany and make sure they don't do it the way we did it," he said.

He said the unrealistic exchange rate of one Deutschmark to one East German mark was the "biggest mistake." Since South Korea has time, it should prepare for reunification so as not to damage the self-reliance of the North Korean economy, he added.

The Institute is a government-funded think tank that studies and evaluates economic policies related to German unity. Questions and answers follow:

- What are the policy mistakes during German reunification that South Korea should avoid?

First of all, the biggest mistake was the currency union that set an unrealistic exchange rate of one Deutschmark to one East German mark, contrary to the market rate which was about 1:4 at the time. It was a populist policy aimed at increasing East German people's purchasing power, but instead the policy resulted in sending prices of East German products skyrocketing and giving an enormous cost shock to East German enterprises. As a result, numerous East German businesses bust. The current high unemployment rate in the former East is the outcome of that policy.

- How were East German enterprises put into private hands?

Most of the East German businesses were handed over to West German or foreign investors. As they had had no opportunities to accumulate capital under communism, East German businessmen were only able to take over small and medium-sized construction firms with bank loans. Most of them went bankrupt as the construction boom faded in the late 1990s.

- Why is there still an economic gap between East and West Germany?

West German car, machinery and electronics makers still produce their core components at plants in the West while depending on East German plants only for low-value-added components. The ensuing labor productivity gap has led to an income gap. With the East having only SMEs, East Germany accounts only for 9 percent of Germany's entire GDP, although it has more than 20 percent of the population.

- Do you think that the 1.2 trillion euros that has been invested so far has been effective?

Half of the total cost of German reunification has been welfare costs including unemployment benefits. That could have been saved if plans had been worked out properly in the first place to support self-reliance in the East German economy.

- What advice do you have for South Korea?

There were many policy mistakes, because the German reunification took place too suddenly. I'd like to stress that you shouldn't implement policies that could damage to the self-reliance of the North Korean economy. After reunification, you should give support like long-term loans to massive state-run enterprises in North Korea so that North Koreans can take them over and manage them themselves. In that way, the North Korean economy will acquire self-reliance and lighten the burden for a unified Korean government.