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East Germany Faces Economic Challenges

SUDDENLY West German economists are having to rethink their world. It was only Oct. 9 when massive crowds of East Germans demonstrated in Leipzig; just Nov. 9 when the Berlin Wall was opened. On Tuesday the East German government announced it will open the historic Brandenburg Gate by Christmas, allowing visa-free free movement across the border with West Germany a week earlier than planned. East Germany could have a free election in the next several months. The two German governments agreed they will sign a pact integrating a broad array of social, economic, and political activities.

Ulrich Ramm, chief economist of Commerzbank, one of West Germany's Big Three commercial banks, suspects that East Germany economic reforms will advance less smoothly and quickly than democratization.

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In an interview, Mr. Ramm noted that East and West Germany will weld closer political ties and economic links. ``But economic reunification is further away because the East Germans are far away from a market economy.''

East Germany, in Ramm's estimation, has a standard of living that is only one-third that of West Germany. Assets of his bank alone are probably not much different than the entire national income of East Germany. Ramm figures it will take at least a decade to bring per capita income in the German Democratic Republic (GDR) close to that in the Federal Republic of Germany. He regards it as essential that progress be sufficiently rapid to maintain the confidence of East Germans in the economic future of their state. Otherwise, too many will leave.

``We don't want to see East Germany a country without people,'' he says. At present 2,000 East Germans among the crowds crossing to visit West Germany stay behind each day. Over time a drain of that size, particularly since these tend to be young, able people, could cripple the East German economy.

By the end of this year, West Germany will have received 600,000 East European immigrants - 350,000 from East Germany and 250,000 ethnic Germans from Romania, Czechoslovakia, Poland, and the Soviet Union.

Ramm figures West Germany should develop a ``Marshall Plan'' for East Germany. Indeed, he suggests Bonn might want to use loan funds still in existence from the original Marshall Plan that the United States provided for West Germany's postwar recovery, starting in 1948. These funds, in West German marks, at present are loaned for environmental projects and other programs. He would like that money invested in small and medium-size companies in East Germany. The GDR most needs investment in telecommunications, transportation, electricity, and the environment, says Ramm.

Some East German politicians dream of establishing a third way of economic development embracing socialism, free markets, and ecological measures. Ramm believes the West German economic model is more practical, offering less pure capitalism than the US but broader social welfare programs.

Meanwhile, East Germany must tackle these problems quickly:

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Foreign investment. It must pass a law to permit West Germany and other Western nations to invest in East German enterprises. Aware of the fear of some East Germans that their economy could be quickly dominated by Western concerns, he talks of joint ventures in which foreign partners would be limited at first to 50 percent ownership. His own bank plans to open a business office in East Berlin to provide information about trade and investment. At the moment, seven foreign banks have representative offices there. None are West German.

Subsidies. East Germany must reduce its huge subsidies on food staples, some clothing, and housing so that prices can rise toward West German levels. For example, East Germans might pay only 3 percent of their salaries on housing, compared to 20 to 30 percent in West Germany. Changing this will involve offsetting boosts in wages.

Taxes. The GDR must develop a proper income tax and/or a sales tax on goods and services of the type common in Western Europe. At present, the state derives most of its income from the enterprises it owns.

Private property rights. These must be entrenched in law.

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