Berlin's Economic Future

BERLIN is being defended by the West at high risk. The chances for holding the city seem good, but victory will be hollow if the economy of West Berlin fails, as the Communists hope.

Before the Cuban crisis, the East German regime had high hopes for a speedy takeover in Berlin. Utterances at Party meetings and in the press made that clear. Khrushchev’s new line has compelled the East German government to defer its plans indefinitely. Barring a new major change in Soviet policy, Ulbricht must now pin his hopes mainly on economic attrition. Is the Berlin economy likely to reach a point where either the allies or the people of the city may feel that it is wise to make some accommodation with the Communists?

The visitor to Berlin, particularly if he has not seen the city for some years, will be struck by the recent gains in construction, in the number of cars, in all the outward signs of affluence. During a short visit, moreover, the Berlin atmosphere can be very exhilarating, and the feeling grows strong that the city can survive because it must survive.

The Wall heightens the emotional reaction to Berlin. As the visitor walks up to it, he finds himself confronted with a shoddy piece of masonry which at first sight hardly seems capable of cutting a large city in two. At the Brandenburg Gate, the Wall is not high enough to block the view of a tall man. A man of medium height can chin himself on it and look over, as General Clay did in November, 1962. But the Wall runs on and on, interminably, implacably. Impervious to argument, to sentiment, to anything human, this row of cement blocks speaks more eloquently ol Communism than Ulbricht ever did. And as the visitor stares at it, mile after infuriating mile, he learns more about the values of the West than the most articulate prophet of freedom may have been able to teach him.

The visitor returning from the tour of the Wall, and perhaps from a short trip into the Soviet sector, carries away a strong sense of the strength of West Berlin. But if he spends considerable time in the city, doubts begin to assail him. He will notice that the bustle and the traffic in the streets are less than in West Germany. He will become aware of the predominance of elderly women. His eye will wander away from the new architectural showpieces to the many buildings that are shabbily repaired and to the many ruins and empty lots which together make up perhaps two thirds of the total area. He will remember, if he has done his homework, that West Berlin is heavily dependent upon subsidies. He cannot help wondering whether all this reflects a lag in reconstruction or some deep-seated malaise.

The answer is that it is more than a lag, but that the problem can be solved. To appreciate the economic problems of Berlin, it is necessary to go back to the city’s pre-war role. As the capital of Prussia and later of Germany, Berlin was the center of a vast bureaucracy. It was also the financial capital of Germany, where the main offices of the big banks and of many other enterprises were located. It was, in other words, a combination of Washington and New York, much as London and Paris are. But the center of heavy industry was in the Ruhr, although Berlin was strong in the electrical industry. Berlin was also the winter headquarters of the Prussian aristocracy which at one time had attended the court; it was a strong intellectual center; and it had the tourist traffic and the many ancillary activities tfiat accompany such attributes.

Most of this centripetal power is now gone. West Berlin is a municipality, with a bureaucracy attending the needs of 2.2 million people. The banks and most other big enterprises have moved their main offices to West Germany, and Berlin has become an out-of-the-way place, far from the mainstreams of German life.

The deep gap in the city’s economy has had to be filled by the deliberate creation of industries. This had to be done in the face of great handicaps. Berlin is a city without a hinterland. An island in a Red sea, it cannot draw its resources from, or sell its products to, the immediate surrounding area. It must make its living by importing fuel and raw materials from the West and by shipping back the finished products. Its access routes are vulnerable to Communist interference. These are not the makings of a strong industrial economy.

Berlin also had been hit harder by the war than most other German cities. One third of all housing was destroyed or rendered uninhabitable. Dismantling of industrial equipment, with the Russians nearby, was particularly thorough. Unemployment was heavier than in most other parts of Germany.

As a result, the recovery of Berlin lagged behind that of West Germany by perhaps five years. While in the West the economic miracle was beginning to take shape, in Berlin the only miracle was that after the blockade economic life in some form was possible at all. Unemployment in 1950 amounted to 32 percent of all possible wage and salary earners.

But Berlin could count on two advantages. One was the great effort made, inside and outside the city, to get it going again. Americans, Berliners, and West Germans contributed ideas, effort, and money. When American aid came to an end, the West German government took over.

The second advantage came from Berlin’s role as a marginal supplier. So long as there was free capacity in West Germany, new orders were slow in coming. But as capacity in the West became crowded and delivery times lengthened, as wages rose and labor became scarce, people remembered Berlin. Suddenly, as West Germany was running over with economic activity, the half-empty barrel that was Berlin started to fill. The city was not far from catching up with West Germany when it was struck by the economic calamity of the Wall.

he Wall suddenly deprived West Berlin of about 7 percent of its labor force — workers who had been living in East Berlin and, under the jeers of the Communists, had daily crossed into West Berlin to jobs with better pay than those in the East sector. The loss of the labor force was partly compensated for by very rapid productivity gains. But the impact slowed down the expansion of the Berlin economy. Economic growth during the first half of 1962 was only one percent per year. New orders dropped by 18 percent.

In the days of heavy unemployment, the loss of part of the labor force, human considerations aside, would have been an economic gain. But with full employment approaching, it hurt the Berlin economy badly. It also brought into focus a problem that was bound to manifest itself sooner or later.

West Berlin’s chances of economic survival depend upon giving its population a living standard at least as high as that of other large German cities. Otherwise, people will simply pack up and move, as many already have done. With job openings in West Germany exceeding the number employed by six to one, the economic risk is small. What has held people, aside from their attachment to the city, has been the housing shortage in West Germany, but that is bound to abate someday.

It is clear, therefore, that West Berlin could not indefinitely trade on a relatively low wage level as a means of attracting industry. Prior to the building of the Wall, that, in fact, was what Berlin was doing. The difference between wages in Berlin and those in large cities in the West was not tremendous, averaging perhaps 10 to 15 percent. But the method of attracting industry by offering relatively cheap labor was in the long run incompatible with the maintenance of a stable or growing labor force.

When the Wall suddenly made labor scarce, it may have improved the prospects for viability. Berlin no longer could attract capital by offering cheap labor. It had to attract labor by offering well-paid jobs. By having to convert itself into a place where it was attractive to go, it also had to become a place where it was attractive to stay.

A big start on the solution of this problem was made when industrial wages in West Berlin advanced 18 percent in 1962 over 1961, against an increase of about 11 percent in West Germany. Even at their new level, wages are somewhat below those of West Germany, but countervailing attractions are offered, to which I shall return presently. Meanwhile, it is important to view the labor-force and wage situation in Berlin against the long-run demographic trends of the city.

BERLIN suffers from an imbalance of the sexes, a low birthrate, and a population that is generally overage. The tourist’s impression that most people in Berlin are elderly women is only a mild exaggeration. There are 1363 women in Berlin to every 1000 men. War losses have produced similar disproportions throughout Germany, but in Berlin the situation has been aggravated by the emigration of active young males. Of the total Berlin population, the proportion of the people aged sixty-five and over is 18.2 percent, as against 10.6 percent in West Germany. From 1950 to 1960, the birthrate, plus the migratory movement, was insufficient to maintain the level of population, which declined slightly.

The ultimate result of these population trends, if they were to continue unchecked, would be to reduce the labor force of West Berlin by about 20 percent in fifteen years. Perhaps this would favorably affect the level of wages and make Berlin a more attractive place to work in. But it would slow the growth of the Berlin economy, sap its vitality, and quite likely reduce willingness to stay in the city. The allies might find themselves defending an old people’s home.

Every healthy city has a steady inflow and outflow of population. People move partly for economic reasons, partly for a variety of personal motives. For Berlin, the personal motives are heavily weighted in favor of emigration. Even allowing for the considerable equanimity of the average Berliner, life in Berlin does impose a nervous strain. The official view is that whatever happens to Berlin also happens to West Germany. No one, according to this reasoning, can increase his safety by moving to the West. But in his private thoughts no Berliner can be completely sure that West Berlin will not someday come under a different kind of regime. Many no doubt toy with the idea of moving and then decide against it because there always seems to be time. A sudden invasion by the East Germans or Russians is unlikely and in any case would presumably touch off a war. A gradual encroachment, if it should not lead to war, would still provide a chance to get out.

Aside from the element of danger, the isolation of Berlin is oppressive to many people. It induces a state of mind that in oceanbound communities sometimes is called an island psychosis. The circumference of West Berlin is less than one hundred miles; every car ride of any duration, every good hike, brings Berliners to the boundary of the sector or zone. To get out by plane is expensive; travel by train, car, or bus involves uneasy contact with the East German police. These handicaps drive some people away and no doubt keep many from coming.

Great efforts are being made by the West German government to provide attractions for those who already live in or who want to go to Berlin. Tax and other subsidies have always existed. After the building of the Wall, Mayor Willy Brandt and his able Senator for Finance, Professor Karl Schiller, spent half a year arguing with the Bonn authorities how best to step up the subsidies. As a result, West Berliners enjoy some attractive tax and other benefits.

For people in the upper income brackets the principal bonus is a reduction in the personal income tax, by 30 percent below rates applicable elsewhere in Germany. For those in the lower brackets, where this may be no great bonanza, a cash bonus has been established which begins at a rate of 5 percent of pay for those with the smallest income and continues at progressively lower rates until the income reaches $8500. This is a kind of negative tax which, together with recent pay increases and a relatively low cost of living, may put the Berlin worker on a par with workers in other large West German cities.

Special credit facilities are offered to small businessmen and refugees, as well as to homeowners. Even for apartment rentals, financial aids can be obtained to cover the down payment (contribution to construction costs) which in Germany is often asked of tenants. Thanks to these arrangements, Berlin has come to be known as the best place in Germany in which to get married.

How effective benefits like these can be in drawing labor to Berlin time alone can tell. The city administration assiduously counts every immigrant. The balance has fluctuated from month to month, but on the whole it seems to have been favorable. To make up for its adverse demographic structure, Berlin needs to attract a net inflow of 15,000 workers each year. In 1962, the inflow was 18,000, and most of the newcomers were under twenty-five years old. If this keeps up, Berlin’s labor force will not shrink, although it will grow very little.

The city and the Federal government are working hard also to attract business to Berlin. Some very rich tax deals are open to those who are willing to venture. Corporations get in effect the same 30 percent income tax reduction that individuals in the upper income brackets enjoy. More important, the corporations can write off 75 percent of investment expenditures during the first year. In addition, 10 percent of the value of movable equipment purchased can be taken as a credit against income tax.

The German turnover tax of 4 percent levied on all wholesale and retail sales is waived on Berlin products sold outside the city. If the products are resold by their purchaser, the tax is waived a second time. This tax bonus had the probably unintended effect of mobilizing a large part of the tobacco industry and causing it to move to Berlin.

Businessmen have compared Berlin to an unattractive girl with a large dowry, to which Berliners have replied that the girl is not at all unattractive, but that in her lovely home she happens to have an unpleasant subtenant. Whichever way one looks at the tax advantages provided, it is not difficult for a firm to overcome the drawbacks of a Berlin location. But German businessmen have been realistic. They obviously feel that to settle in Berlin means to put one’s neck in a noose. Companies that have most of their assets in Berlin may have excellent earnings and dividends, but their stock will not be appraised very highly by the stock exchange. An industrialist placing an order with a Berlin company may demand some sort of insurance against obstacles to delivery. A Berlin firm may be able to get orders only if it can demonstrate that it has standby facilities in West Germany or that it can take care of the customer’s needs from stocks carried in the West.

A RENEWED blockade is the perennial nightmare of people living in and dealing with Berlin. It happened in 1948, but a spectacular airlift defeated the blockade. Few believe, however, that this feat could be repeated. It was one thing to airlift the minimum food and fuel needs of a hungry city. It would be quite another to keep going a prosperous industrial operation, with its vast inflow of materials and outflow of finished products.

West Berlin today is well stocked with coal, foodstuffs, and other basic necessities. It could eat and live under blockade, even without airlift, for a long time. But no airlift that seems feasible with the city’s limited airport space is likely to keep the industries going. If a blockade should at some point be resumed, the choice would seem to lie between military reaction and some vast counterblockade against the entire Soviet bloc, if the Western allies could be persuaded to give up their profitable trade with the bloc. Neither strategy would hold any assurance of saving Berlin.

For the time being, these grim alternatives are being avoided, and all those who invested in Berlin have had a chance to benefit from the extraordinary tax concessions. All, that is, except Americans. It is a peculiarity of the American income tax system that it automatically appropriates for the United States Treasury tax reductions that a foreign country offers to an American business. Foreign income taxes paid by an American business abroad can be credited against the American tax liability when the income is remitted to the United States. If the foreign tax is reduced for some reason, the American tax liability automatically goes up. The only way not to lose the foreign concessions is never to remit the income back home.

This problem is by no means unique to American business in West Berlin. Many countries, especially the less developed, offer income tax concessions to American companies. The U.S. Treasury pockets them all. Suggestions have been made to treat taxes forgiven by a foreign country as having been paid for the purpose of computing the American tax, but the Treasury has opposed this.

Suggestions have been made also for shielding American business in Berlin against the consequences of the 1962 tax legislation which tightened the rules on American subsidiaries abroad. This might have been done by declaring Berlin an underdeveloped country, since such countries are exempt from the legislation. But the suggestion has been rejected, on the not unreasonable ground that Berlin is no country at all, being a part of the Federal Republic of Germany. Neither is it underdeveloped — it is the largest industrial city in all of Germany.

As far as the American contribution to West Berlin is concerned, the fact is that the United States, together with its allies, supplies the defense of the city but nothing else. Berlin gets no aid from the United States. On the contrary, local expenses of the 6500 troops that the United States has in Berlin, plus some two to three thousand quartermaster personnel, are defrayed by Germany through Occupation costs. This is not the case with troops stationed in West Germany.

Berlin still benefits from the funds originally derived from Marshall Plan aid. These sums were loaned for reconstruction purposes, and as the loans are repaid the money is lent out again as a revolving fund. The money is the property of the German government, however, and if the United States were to count its use as aid now, it would be double counting.

Since the building of the Wall efforts have nevertheless been made to strengthen American activities in West Berlin. General Lucius Clay, the patron saint of Berlin, has addressed himself to leading business corporations. Some fifteen companies have responded. The scope of their operations is extremely limited, but there is some symbolic value in getting familiar American corporate names into the city.

The Ford Foundation has made important grants to Berlin. Dr. James B. Conant, former president of Harvard and thereafter ambassador to Germany, is spending a year or more in Berlin. Other cultural leaders are making visits. There is talk — still very tentative — about establishing a third university in West Berlin. An automation center is being created, featuring American computers.

Financially, the burden of subsidizing Berlin rests upon the broad shoulders of the Bonn government. The Berlin budget receives a subsidy from Bonn of $250 million. This goes to offset the structural weakness of the Berlin tax base and to meet the many special expenses the city must bear. The tax concessions are worth an additional $100 million. Amounts of this magnitude pose no serious problems within a German Federal budget of $14 billion. Berlin also benefits through the payments made from the Federal budget to its many pensioners, who form a much higher percentage of the population in Berlin than elsewhere.

The greatest benefit that West Germany can bestow upon Berlin is the close integration of Berlin with its own progressive economy. Although under the ultimate control of the allies, West Berlin is a part of West Germany in every other sense, with a common tax system, monetary system, customs area, social service, and civil service. While the city government is controlled by the Social Democratic Party, there is no question that the principles of the German free economy are accepted in Berlin.

It is in the light of this firm tie to West Germany that occasional flirtations with the East, of a most reserved character, must be regarded. In 1958, Khrushchev sent a memorandum suggesting higher levels of trade with the East. Since then, the prospect of large orders from the East German government and other Communist countries has from time to time been dangled before the eyes of Berlin businessmen. There is no doubt that the East would be willing to place such orders and that many Berlin businessmen would be delighted to have them.

Several solid obstacles are almost certain to frustrate these developments. The most immediate block is that the East cannot pay. Trade with Eastern countries is financed through a clearing account. When one side gets ahead with its deliveries beyond the swing credit stipulated in the trade agreement, it stops delivering. East Germany and the other Communist countries have very little exportable merchandise. Unless they are prepared to pay in gold or hard currency, which would be an exception, their capacity to buy from Berlin is limited by their capacity to deliver. This is the immediate reason why only 2 percent of Berlin’s trade is with East Germany. Trade with other Communist countries is included in the trade statistics of the Federal Republic, but since the latter’s trade with the Eastern bloc (excluding East Germany) is only 4 percent of its total trade, the pickings evidently have been slim.

Conceivably, the supply position of the Soviet bloc could improve, or a deliberate effort could be made to win over Berlin by providing adequate supplies. Some expansion of trade could occur under those conditions. It seems extremely doubtful, barring serious depression, that this trade would be allowed to build up to the point where Berlin would become seriously dependent upon its economic relations with the East. In a depression, the danger of economic reorientation of all of Germany would become real.

The danger of political flirtations with the East can also easily be overrated. Mayor Brandt, within the limited scope he has as head of an occupied city, at times has followed a softer line than the Bonn government and the Christian Democratic Party in Berlin would have liked to see. The issue usually is whether benefits that may come from negotiation on particular points — and the points are almost always minute — are worth the increasing implicit recognition and other concessions that the Pankow regime may gain from them. Even the American reaction to overtures of this sort is ambivalent. The United States would like the West Germans to be more “flexible” —that is, more ready to accept whatever accommodations with the Russians the United States may find negotiable. At the same time the United States is suspicious of any German initiatives in an Eastern direction.

The best protection against a turn to the East, in all of Germany but most particularly in Berlin, is the strong anti-Communist feeling that life on the Communist frontier has engendered. This is not always appreciated by outsiders. The German newspaper Der Spiegel reported an exchange between President Kennedy and the British commander in Berlin, culminating in the latter’s reply that East Berlin might not be pleasant, but that it was no concentration camp. Not many Germans, particularly those with friends or relatives in the East, would be so detached. Anti-Communism in West Germany runs deep. The principal danger that Berliners see is not that they might be tempted to turn East, but that their allies might not support them sufficiently in their commitment to the West.

While this concern will probably endure, there is no indication that the United States has done anything but firm its resolve to defend Berlin. That should take care of the military and political side of the Berlin problem, if anything can. The economic side is largely in the hands of the Bonn government. From all appearances, the existing level of trade, the subsidies, and the tax benefits are sufficient to keep Berlin’s economy expanding and to enable the city to maintain an adequate labor force. Should these means prove insufficient, the Bonn government can increase them to the point where they can do the job. If present circumstances continue, there is every reason to believe that West Berlin is viable.