A Tale of Two Cities

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With her cropped hair and stylish jeans, Kerstin Vogt seems every inch the successful German businesswoman. Vogt is the manager of the East & West Jeans Co., a trendy clothing store at Jena's Goethe Galerie, an upmarket shopping center in the heart of the eastern German town. It's hard to believe that only 10 years earlier, on virtually the same spot as her store, Vogt scraped by as a legal secretary for a sprawling East German factory. "I'm pretty well off now," she says, "so obviously I think life is better." Just an hour to the north, in a grimy industrial town called Wolfen, Helmut Otlewski, a university-educated research chemist, survives on a make-work government job as a museum tour guide. "Most of my friends are unemployed," Otlewski says. "I cannot look at the future, because we have no future."

Jena and Wolfen define the two extremes of what has happened in eastern Germany since the fall of the Berlin Wall, 10 years ago this week. On Oct. 3, 1990, the former German Democratic Republic ceased to exist and was absorbed into its western sibling. Almost overnight, citizens of the former East Germany received the deutsche mark, western social benefits, and a host of newfound freedoms. But as the lessons of Wolfen and Jena show, the pace of development has been radically uneven.

By most accounts, reunification has been an unvarnished political success. "It was an exceptional demonstration of national unity," says Kurt Biedenkopf, a western politician who moved to the east and won election as premier of the state of Saxony. "At the time it wasn't self-evident that the strong parts of Germany would be willing to support the weak." Biedenkopf said that eastern Germans displayed "tremendous courage" by their willingness to undergo radical change, something he doubts would have been possible in western Germany.ÊWhat's more, easterners have slipped easily into the mainstream of German political life. Angela Merkel, chosen in April as leader of the opposition Christian Democratic Union, is an Ossi. So is Wolfgang Thierse, a prominent member of the ruling Social Democratic Party and now the president of Germany's parliament.

No matter how great the political achievements of reunification, economists are less sanguine about what happened in the east. Hans-Werner Sinn, head of the Ifo economic research Institute in Munich, recently grabbed headlines by proclaiming reunification "an economic failure." While not all economists are so gloomy, it's clear that former Chancellor Helmut Kohl's 1990 promise that the east would become a "flourishing landscape" within three or four years is largely unfulfilled. Unemployment remains stuck at 17% in the former East German states, nearly double the figure in the west. That disparity would likely be worse if the government hadn't spent $500 billion in the east on infrastructure projects and social benefits.

If the success in transforming Jena from a sclerotic East German factory town into a flourishing technology center can be traced to one man, he is Lothar Späth. Formerly premier of the western state of Baden-Württemberg, Späth was persuaded in 1991 to move to eastern Germany and attempt a rescue of Carl Zeiss, a once-famous maker of cameras and microscopes. "I found a disaster," Späth recalled recently. The company had sales of $300 million a year and losses of $100 million. The firm made products nobody in the West wanted to buy and its former customers in the Soviet bloc could no longer afford. Späth set about rebuilding the firm and dividing it into two parts: an optics and telescope maker, which kept the name Carl Zeiss; and a new firm, Jenoptik, headed by Späth, that took over the other lines.

Späth started by closing down most of Jenoptik's production and laying off 16,000 employees, more than half the workforce, in a single sweep. As a top figure of the ruling Christian Democratic Party, he carried tremendous clout with both the Jena and Bonn governments. Working with a group of 15 managers he recruited from the west, Späth redesigned not only Jenoptik, but the town around it. He turned the company's factory buildings in the center of Jena into a shopping mall, office buildings and universities. He raised $500 million in private investment for Jena's redevelopment. For the first two years, Jenoptik made most of its money as a real estate developer, using the profits to invest in new products.

Because of his connections in western Germany, Späth was able to come up with a government aid package for Jenoptik worth $1.5 billion. Two-thirds of the money went to pay off Jenoptik's debts and pension obligations. He used the rest to acquire west German companies. It was a bold strategy at a time when western companies were snapping up bankrupt eastern firms. "Politicians had the idea that eastern Germany would have this market in eastern Europe while western Germany served the West," Späth says. "It was completely wrong because when the East Europeans started to pay in dollars, they wanted the best product they could get for their money." The engineers at Jenoptik had some good ideas for new products, but the company had no sales or marketing channels in the West until Späth bought western German firms.

Today, the drastically slimmed-down Jenoptik is an unqualified success. Sales are soaring 20% a year and profits 30%. Späth thinks the company will continue to grow just as strongly for the next four years. It now consists of 100 separate firms organized into three divisions, one specializing in lasers, one making technologically advanced factories for other companies and one specializing in venture capital investments. It's listed on the Frankfurt stock exchange and has spun off a number of successful daughter companies like CyBio, which makes sophisticated medical testing equipment, and Asclepion-Meditec, a maker of sophisticated lasers used in eye and dental surgery.

Jena is a university town, and its streets are brimming today with institutes of particle physics and microbiology. A third of the town's 100,000 people are skilled laborers or have a university degree. Even with its homegrown resources, Jena could not have prospered without Späth acting as the traffic cop directing restructuring. Thanks to his contacts in the west, he was able to attract outside management talent into what was very much a frontier lifestyle. "When I arrived with the first 15 guys from West Germany, we lived together in a single house," Späth recalled. "There were no hotels or anything." Today, 90% of Jenoptik's managers still come from the western part of the country. One result is that half the town's population has changed in the last 10 years, according to Mayor Peter Röhlinger. Unlike most eastern cities, Jena's population is back up to its 1990 level, as workers have stopped fleeing westward. "It's really an adventure here," says Michael Dettelbacher, 40, who was recruited recently to be chief financial officer of Asclepion-Meditec.

Jena is not alone in making a relatively smooth transition to capitalism. Dresden's semiconductor industry is so successful that the city has been dubbed Silicon Saxony. The U.S. semiconductor maker AMD late last year opened a 30-hectare factory in Dresden that is described as one of the most advanced in the world. AMD was attracted by the qualified workforce and the federal and Saxony governments' willingness to pony up $400 million of the chip plant's $1.9 billion cost. It's a fact of life that most new business comes to eastern Germany primarily to capitalize on government grants and tax breaks.

Another factor in the region's success is the relative weakness of organized labor. While western employers and labor unions tried to dictate wages to eastern factories at the time of reunification, fearing a mass migration of workers to the west, more and more companies in the eastern German states are rejecting the national wage pacts and coming up with their own flexible work schedules. According to Udo Ludwig, an economist at the Institute for Economic Research in Halle, by 1999 wages in the east were still only 67% of those in the west.

You'd never guess by looking at it today, but Wolfen was once a center of high technology too. Color photographic film originated in Wolfen back in 1936, when the town was headquarters of the German industrial giant Agfa. But after the Berlin Wall went up in 1961, Agfa fled to the west. The rambling factories left behind were reformed by East German authorities into a film company called ORWO. The firm employed 15,000 people and sold almost all of its production to the Soviet bloc.

Helmut Kohl's controversial decision to replace East Germany's money with the far stronger deutsche mark dealt ORWO a death blow.ÊFormer customers in the East Bloc didn't have much hard currency to buy film; those that did preferred more technically advanced products from Western giants like Kodak or Fuji. ORWO went bankrupt. A western German start-up called PixelNet has now tried to revive ORWO as a printer of digital photos downloaded from the Internet. That's an innovative idea, but ORWO today employs just 60 people. Most of its buildings lie vacant and decrepit.

Lutz Born, the mayor of Wolfen, says the town has been shattered by economic restructuring, losing a total of 40,000 jobs.ÊDuring the communist era, many of those workers had been transplanted from other parts of eastern Germany and resettled in a bedroom community called Wolfen Nord, an area of decaying prefabricated apartment blocks. With the loss of jobs, Wolfen's population has shrunk from 43,000 in 1990 to just 32,000 today. The unemployment rate in Wolfen Nord is officially 35% and probably closer to 50%, Born says. And because of the town's shrinking tax base, Wolfen has been forced to lay off 400 municipal workers.

At a bar called the Al Capone, named after the 1920s American gangster, laid-off workers now gather to while away the work days over glasses of beer. "Reunification isn't bad," jokes Frank Ratajczak, a 45-year-old former chemical plant worker. "Now we can travel freely or go shopping. The only problem is we don't have any money." Asked why he doesn't look for a job elsewhere, Ratajczak says he doesn't have the financial resources. Ratajczak's unemployment benefits ran out years ago, and now he survives on welfare payments.

Wolfen's plight underscores a major problem in the states of eastern Germany. When their factories closed 10 years ago, many easterners were in their late 40s or early 50s. Now listed as unemployed, they are part of a large, unskilled underclass that will likely never have a job again, except in a government make-work program. They are in a twilight zone waiting for their state pensions to kick in

Their predicament has inspired much anger. Birgit, a 40-year-old unemployed cook, burns with hatred for the 1,500 ethnic Germans from Russia who have been resettled in Wolfen Nord, as well as the Indians and Vietnamese who run stalls at the outdoor market. "Of course we all hate foreigners," she says. "The government trains them, and then they get the best jobs." Such resentment has led to a disturbing rise of right-wing extremism in eastern Germany. Two of the three men convicted of killing an African man in Dessau in June came from Wolfen Nord. Mayor Born says that about 17% of voters in Wolfen, and closer to 30% of those in nearby small towns, support the German People's Union, one of several rightist anti-immigrant groups in Germany. Ê

The Schröder government accuses the Kohl administration of some major mistakes in the past, such as overstimulating the construction industry with subsidies, leading to the current rash of bankruptcies and vacant buildings. Even with all the construction visible in the new states, the building industry is actually shrinking.ÊThat is why economists like Halle's Ludwig believe the government should alter the Solidarity Pact, a program of economic assistance for the eastern states, that must be renewed by 2004. While most economists support infrastructure projects like new roads and trains, they oppose the government's continued efforts to subsidize private companies. "After 15 years of support," Ludwig says, "good companies will not need help and bad enterprises won't have any more chance to become good."

Chancellor Schröder recently toured the states of eastern Germany and his message was simple: It's a long journey, and the states of former East Germany are only halfway there. The towns of Jena and Wolfen show, however, that while government help remains an indispensable part of the solution, it's not only the size of the financial aid that really counts, but how well the human capital is used that matters.

With reporting by Regine Wosnitza/Jena