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German Democratic Republic: long history of sustained economic growth continues; 1989 may be an advantageous year to consider this market - Business Outlook Abroad: Current Reports from the Foreign Service

U.S. firms may find that 1989 is an advantageous year to consider entry into the GDR marketplace. The decline in the value of the dollar versus the deutsche mark, yen, and other currencies already has begun to produce sales through enhanced price competitiveness. Also, GDR bilateral trade surpluses should leave excess dollars in the hands of Foreign Trade Enterprise buyers to acquire U.S. sourced goods. Finally, the bilateral political relationship is improving.

Long History of Sustained Economic Growth Continues; 1989 May Be An Advantageous Year to Consider This Market

The German Democratic Republic has had a sustained record of economic growth in the 70s and 80s and maintains a good credit rating with the international banking community. Growth could continue in the 3-5 percent range through the rest of the decade, although the outlook for the 1990s is difficult to foresee in light of the Soviet reform program and the formation of the unified European Community market in 1992. The GDR should remain the largest importer of Western goods among CMEA member states, with the exception of the U.S.S.R. Sophisticated products and processes for flexible automation, energy conservation, measuring, testing, and process control are continuing import priorities, as are CNC machine tools, consumer goods, and agricultural products. For the future, environmental equipment and packaging machinery should see increasing demand, as well as road construction equipment, telcommunications equipment, and other aspects of the over-burdened public infrastructure. The following report was prepared by the U.S. Embassy in Berlin.

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With a Produced National Income (PNI) of 270 billion marks and a population of 16.6 million people, the German Democratic Republic is generally credited with the highest standard of living in the Council for Mutual Economic Assistance (CMEA). In 1984, one source estimated per capita income at $9,800, although the fact that the GDR mark is not convertible makes this estimate somewhat speculative when comparing it with the calculation of per capita income of western economics. Furthermore, the GDR has had a history of sustained economic growth. Since 1971, the GDR has had an average annual growth rate of more than 4.6 percent in its PNI. Many western analysts discount these figures by 2 percent per annum when recording GDR actual growth. Despite the fact that this net material product type measure does not properly account for services and inflation, this is a fairly impressive performance. The GDR generally is ranked among the ten top industrial nations of the world.

In contrast to some other Eastern European economies, the GDR has no difficulty in obtaining credits or financing transactions. At the end of 1987, the GDR had deposits with banks reporting to the Bank of International Settlements of roughly nine billion U.S. dollars, while gross external hard-currency debt probably did not exceed $17.5 billion. American banks generally seek to extend credit to the GDR, but usually find that the terms are so fine that they would not receive a sufficient return. Looked at in another way, the GDR receives a credit rating second only to the U.S.S.R. among CMEA countries when judged by the western financial press. Some U.S. banks are even suggesting to GDR officials that they manage the GDR's conservatively held assets for a fee, but the German Foreign Trade Bank (DABA) is apparently resisting such overtures.

One thing that U.S. business will not find in the GDR are radical economic reform proposals. There is very little interest here in some of the newer thinking from the U.S.S.R., China, or Hungary such as currency convertibility, joint ventures, or direct investment.

Based on plan projections and the GDR's record over the last two decades, one must assume that the GDR will continue to achieve steady growth over the rest of the five-year plan, i.e. , 3.5 to 4.5 percent nominal growth of PNI in 1989 and 1990. The GDR economic leadership has given no indication of major policy changes in that period that would disturb this picture, even in less controversial areas like increased investment or hard-currency deficits. Furthermore, some of the objective factors that contributed negatively to the GDR economy in years past should start to turn to the GDR's advantage.

Peering beyond 1990 for the GDR is made extremely difficult by the number of major economic policy questions that remain unanswered. What will be the goals of the current or a new team for the 1991-95 five-year plan? The GDR claims that it will have solved housing as a social problem by that date. What use will be made of the substantial sums that have been devoted to this program, i.e., more than 105 billion marks from 1980 to 1988? Will the GDR raise investment spending back to the levels of the early 1970s in order to revamp its outmoded heavy industry and will it begin to run hard-currency deficits in order to pull in the modern western machinery that will speed growth? Will the GDR begin to spend the billions necessary to clean up its heavily polluted air and water? Finally, will the GDR begin to experiment with the kind of fundamental economic reform one sees in the U.S.S.R., Hungary, or China'? All of these questions for GDR planners and decisionmakers will in turn be heavily influenced by two external policy factors. The first, and by far the more important, is whether the U.S.S.R. will continue on its present radical reform course. If the Soviets give their enterprises real autonomy to buy what and where they will, or if the CMEA begins to use a truly convertible currency, at least for trade among its members, the GDR will need to adapt its economic policy course. Secondly, the emergence of a unified EC internal market in 1992 could present the GDR with real problems in maintaining inner-German trade, which makes up 50 to 60 percent of the GDR's total trade with western countries.


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