austin-murphy-the-triumph-of-evil

204 THE TRIUMPH OF EVIL
ring in Eastern Europe, both by providing greater demand than actu­
ally occurred for Eastern European products (from higher East Gennan
income) and by serving as an example to the other countries of East­
em Europe on how a successful transformation of their economies can
occur. For instance, it might have been possible to avoid the disastrous
policy of changing Eastern European trade from a system of multi­
lateral barter on December 31, 1990 to a system where all trade was
paid for strictly in hard currencies like the OM (Sabov, 1991 ). Besides
thereby avoiding the resulting huge decrease in trade between Eastern
European countries, the catastrophic policy of depreciating the Russian
ruble enormously in 1991 to make it convertible (as will be discussed in
Chapter 6) might also have been avoided (Hays, 1991 ).
Restructuring Costs
The analysis so far has not explicitly considered any special frictions
or restructuring costs (including retraining expenses) associated with
shifting investments and resources from one sector to another. Instead,
any such costs have been assumed to have been incorporated into th e
rate of return on investment, which are measured net of such costs.
However, in the case of massive investments in some sector or indus·
tries, such as the export sector, restructuring costs might be higher than
normal. Such additional costs would reduce the return on investment.
East Germany would incur such costs for its own investments, while,
for foreign investments, East Germany would have to decide whether to
bear the costs in order not to discourage foreign capital or suffer a lower
level of foreign investment as a result of the lower level of profitability
available to foreign investors.
Because there was no unemployment in East Germany, and workers
were in fact guaranteed the right to a job for life, the costs of restruct � ­
ing might be highest in terms of labor due to the lack of slack in thts
resource input. To attract workers into growing industries such as the
export sector, it might be useful to have most of the wage increases con·
centrated in those industries (and especially for needed skilled workers
to keep them from emigrating). In addition, a special payroll tax might
be levied on all workers that could be used to further increase wages
in critical industries with labor shortages and to pay for any needed
additional training. This reallocation of wages might reduce the costs of
restructuring born by the entire economy.
CHAPTER 5 205
It should also be emphasized that incorporated into the historical 18%
return on investment are the costs of restructuring normally incurred by
East German investments in the past. These restructuring costs included
those associated with about 2% of the population moving annually
between the 15 different sectors or states of East Germany (Statistisches
Amt, 1990). In addition, Eastern European socialist countries typically
were involved in retraining over 5% of the work force each year in
normal times (Marcy, 1990).
In any event, the costs of restructuring would only penalize the return
on investment in the initial year and therefore would not materially
affect long-term growth or long-term investment decisions. Even if the
amount of such costs were as high as 30% of the first year's profit from
each investment, that would only reduce National Income growth by
about 2%, which is fairly minor compared to the double-digit National
Income growth that would be expected to be caused by the massive
investments.
In addition, it is likely that East Germany ' s greater openness to trade
might actually increase the return on investment more than enough to
�ffset any restructuring cost problems. In particular, expanded interna­
honal trade allows a country to specialize in producing the goods and
services that it produces most effectively and thereby permits concen­
trated investment in the sectors where it can earn the highest returns
(Eiternan, Stonehill, and Moffett, 1998). For instance, the return on East
German investment in the textile consumer good, and electrical indus­
tries exceeded 40%, compared to ' under 1 00/o in energy and constructi . on
(Mueller, 1978). Concentrated investment can also enhance economtes
of scale and scope, thereby lower costs, and further enhance returns.
The Risk of Inflation, Emigration, and Productivity
Problems
As previously mentioned to inhibit foreigners from being able to
Purchase East German products at subsidized prices, the prices of all
&OOds and services in East Germany would be allowed to rise to market-
c)
•
• ta'
c eann g levels that cover costs. However, to avoid inflation, mam 10
onsumer confidence in the economy (and thereby increase morale, as
0Pl>osed to experiencing the productivity decline and emigration that
actually occurred in early 1990 without the plan), avoid poverty, and