austin-murphy-the-triumph-of-evil

192 THE TRIUMPH OF EVIL
The extremely high economic growth would slow as the number ofM
required to generate a DM of exports fell. In particular, after the most
modem and valuable Western capital was imported (that had a value
equal to at least 4.4 times that of domestic East German capital}, the
marginal value of the Western capital (relative to East German capital)
would decline. Given that there were an annual M78 billion in export
subsidies needed without foreign investment, the annual M53 billion
in savings related to exports created by foreign investment replacing
domestic exports would disappear in about 1.5 years. At that point,
every DM 1 of Western capital would have the same value as M 1 of East
German domestic capital, and the multiplicative effect would dissipate
(although the slight 21%-18%=3% difference in rate of return might
persist).
In any event, modem Western capital could have easily been used
to replace the expensive East German investment required to make
East Germany's export industry competitive at a far lower cost, thereby
allowing the country's normal domestic investment to alone keep the
East German economy growing at its past average rate of 2% higher
than in West Germany, plus possibly an extra 1% more because of
the higher domestic investment rate assumed (27% versus 22%). At
the same time, the enormous Western investment (whether invested
for export-related production or for domestic consumption) would
increase this growth rate by at least 4% (as previously explained). The
resulting real East German economic growth rate would be a minimum
of2%+4%+ 1 %=7% higher than existed in West Germany.
Given that East German per capita National Income was already two
thirds that of West Germany's in 1989, even the lower 7% higher real
economic growth rate would allow East German income per capita to
catch up to the level in West Germany in about 6 years. However, this
computation does not consider the very powerful effect of the poten·
tial savings in export subsidies (from the DM 117 billion in foreign capi·
tal possibly producing export goods or import-substituting goods that
would replace imports). lf the East German economy grew 19% faster
for 1.5 years (as is more likely given the aforementioned savings in
export subsidies) and then 7% faster for the next 1 .5 years, it would
catch up in just 3 years. Since all these calculations are based on a poten·
tial underestimate of the true amount of Western investment (OM 117
CHAPTER 5
193
billion annually), it is possible that the East German economy would
catch up faster than in 3-6 years.
Under these circumstances, the high unemployment rate, the inequal­
ity in incomes, and the enormous West German transfer payments (that
have averaged DM 150 per year through 1996 with no end in sight)
never would have been necessary. In present value, the plan could have
easily saved Germany over $1 trillion.
RISKS OF DEVIATIONS FROM MODEL EXPECfATIONS
The foregoing results assume specific values for various parameters.
While the estimated parameter values are based on historical data (and
are therefore probably consistent with reality), the implementation of
�new economic policy can change parameter values, and such devia­
tions from assumed parameter estimates can cause different economic
�ults. However, as the subsequent analysis shows, the initial assump­
tions employed are reasonable even within the context of a changed
economic policy, and many possible deviations from assumptions may
�tually have a positive effect on the foregoing results reported. In addi­
tion, any negative effects can possibly be offset by other policy vari­
ables to keep the economic results at least as favorable as found in the
previous section.
Risk of a Different Level of Western Imports Under the
Plan
The f �regoing results were based on an assumption that the East Ger­
� Will spend slightly over half their income on Western goods and
:: tha� each OM 1 of imports essentially mandated M6 . in reduced
�Ices under the plan. Although this assumption may be conservative
difti
UOlphon, �e mandatory savings accounts could certamly lead to
erertt Spendmg decisions.
If a greater amount were spent on Western imports, East Germany
wti. OUid have to transfer even more resources from production for domes-
c consum t. 1·
eoabl datory add1ttonal savings conditional on such �estern ����rts for Western export to cover the cost of the higher imports.
It is reall Y more probable that the import of Western goods would be
the lllan P ton to
. �roduction for export. However, as shown ear 1er,
.
g� East Germany to subsidize production of suffic1ent add1t10nal