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Industrial Restructuring after Reunification and Roles of Industrial Policy in East Germany

Author Kye Hwan Kim et al. Date 2014.12.26 Page 188
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Industrial and corporate structural reforms are one of the essential tasks in North Korea’s transitional period. Based on industry and firm data provided by DIW Berlin, this research attempts to analyze essential features of the industrial structural reform in East Germany at industry and firm level. By utilizing surveys from East German firms, this research provides systematic information of its transitional period at firm-level. Also, implications for future industrial restructuring of Norea Korea as well as two Koreas’ potential industrial collaborations are provided by analyzing policy cases responsible for industrial and corporate structural reform.

The East Germany’s transitional period can also be categorized into largely three phases based on its structural characteristics of economic growth. The first phase, 1990~1992, is characterized by sharp production contractions from the external shock, the unification of two Germanies. The second phase, which starts from early 1993 to late 1994, is marked by economic recovery lead by surging demand in constructions and infrastructures. The third phase, which started from 1995, is where East Germany’s economic growth started to slow down, and change in economic recovery policy of was reconsidered. During this phase, economic structural features went through transformation, including change in proportion of various economic sectors, sectors within manufacturing, and proportion of tradable and non-tradable goods. Restructured economy of East Germany, a mist of her transitional period, have greatly affected the Germany’s mid and long-term growth engines and the characteristics of her economic growth.

The structural reform at firm-level was fast. Privatization took place, and modern production facilities were deployed. Despite many firms now engage in domestic and international trade, formal East German regions are still falling behind West German regions even 25 years after the unification.
What can be learned from East Germany’s industrial restructuring experiences? First, privatizations of SOEs are preconditions for industrial reconstruction. Also, promoting foreign investment and supporting business start-up is essential. It is also important to understand the substantial time it takes to realize the industrial reconstruction and to integrate its economy into global value chains.
For the case studies on East Germany’s industrial reconstruction, Regional Economic Structure Improvement Policy and Innovation Network Implementation Projects were analyzed. Regional Economic Structure Improvement Policy is a notable early phase reconstruction policy, where 95.1billion euros have poured into backward regions of East Germany for 22 years. This policy has transferred large investments in industrial infrastructures and capital equipment, which laid the foundation of East Germany’s economic development. The policy also has contributed in lowering unemployment problems, which became a major issue after the unification.
The Innovation Network Implementation Projects (InnoRegio) were implemented from 2000s to overcome physical investment oriented policy and to promote innovation activities. Moreover, the InnoRegio was based on a consensus to support bottom-up innovation, which arise from regional-level network between industries, universities, laboratories and local municipalities. The policy is now regarded for taking part in greatly enhancing innovation capabilities.
Many issues and implications of North Korea’s industrial restructuring can be raised from East Germany’s transitional period as well as from her past policies. The difference in initial conditions, the role of foreign investment during industrial restructuring periods, and promoting short-term comparative advantaged export industries are all important determining factors. Yet, accumulation of technological capabilities for creating new comparative advantaged industries should be simultaneously concerned. Therefore, this research also provides important standards to seek desirable direction for industrial restructuring in terms of mid and long term perspective.