austin-murphy-the-triumph-of-evil

202 THE TRIUMPH OF EVIL
crnment (Der Tagesspiegel, 1990i). In addition, without the plan, the
cost of earning a DM equaled the exchange rate, which was 3: 1 fo r offi·
cial exchanges and 7: 1 for black market exchanges (Der Tagesspiege/,
1990d), times the unsubsidized price divided by the subsidized price
(which often implied a high double digit M cost for earning a single
DM). Given the plan to raise prices to market-clearing levels fo r foreigners,
and given the greater likelihood of official 1: I exchanges and
very low black market exchange rates (as explained earlier in the sub·
section "Risks of Currency Black Markets"), the cost of earning the billions
in DM sales to tourists would be greatly reduced. It is also very
probable that fa r more in hard currency tourist revenue would be earned
by East Germany since goods and services would no longer be effec·
tively given away for almost free at the subsidized prices and exchange
rates (i.e., at such low prices, demand would likely be extremely inelas·
tic with respect to price). As a result, it seems probable that the plan
overall would decrease the cost of earning hard currency revenues as
opposed to increase it.13
Risk of Different Amounts of Western Investment
It is possible that if there were not political support from West Ger·
many or another Western country, the amount of Westem investment
might not even be as high as under the catastrophic economic scenario
that actually developed. In that case, the great rise in output caused by
such investment would not happen. However, if the Western capital that
flowed into East Germany was only a third as much as the investment
that indeed occurred, that should be enough to generate double digit
growth rates for years.
In addition, even if East Germany had chosen a path politically inde·
pendent of West Germany, its economic and political reforms would
probably have been sufficient to attract a substantial amount of Western
investment, as long as the economy were just reasonably healthy. The
EC had indeed promised both political and economic support fo llowing
the opening of the Berlin Wa ll in 1989 (Der Tagesspiegel, 1990a), and
the USA had expressed its readiness to make substantial investments
(Der Tagesspiegel, 19901). It is therefore probable that, with strong
international political support, with the strong incentives incorporated
into the proposed economic plan fo r foreigners to produce in the country
instead of just export to it, and with a healthy economy, East Ger-
CHAPTER 5 203
many would have attracted far more Western capital than it actually did
wi t h the depression scenario and limited incentives fo r productive foreign
investment that unfolded without using the Murphy plan. Just to
provide an example of the importance of a healthy economy and incentives
for local production, communist China has attracted more direct
foreign investment than any other country in the world (except the very
rich USA) over the last few years (Wei et at., 1999), despite having far
less international political support than East Germany in late 1989 and
despite having a closed communist economic system for most of the
country. Greater foreign investment would only add to the incredibly
high double-digit growth rates projected in the original model (just as it
bas added to communist China's very high real growth rate).
The Risk of Economic Depression in Eastern Europe
Perhaps the greatest risk to the plan came externally from Eastern
E��pe, with which East Germany conducted much of its trade (M60
bilhon in exports and M57 billion in imports in 1989). If this area of
the world suffered the over 40% decline in real GNP over the early
1990s that indeed did happen (IMF, 1996), there would likely be a commensurate
decline in trade with this area. The actual 60% decline in
East Gennan exports to Eastern Europe that occurred in the early 1990s
(Osmond, 1992) would represent a M36 billion drop in demand for
East German goods (representing over 10% of East German National
lnco�) that would require East Germany to replace this loss of pro­
�on and goods with other markets.
H
�wever, the plan's 1:1 exchange rate with the DM would actually
lequ�re a change-over to greater production to meet the demands of
:eater trade with the Western Europeans. The decreased demand for
th'pons to the Eastern European market would free up resources fo r just
18 Pllrpose (while the domestic East German demand for imported
gOOds. from Eastern Europe would be replaced by increased saving and
�IDg on imports from Western Europe). Although this shift in pro­
be� hon would entail significant restructuring expenses, the costs might
o._� because of the centralized control and planning that exist in the
"4[ GPrn.n- •
l '
·•UUllJ SOCia 1st system.
In additio n, · It IS ·
would
also possible that a robust East German economy
have helped prevent the huge economic catastrophe from occur-