RUSSELL J. DALTON, Professor, department of politics and society, UC Irvine

When the two Germanies united on Oct. 3, 1990, economic predictions were rosy. “That’s the pitch the government was giving: ‘We created an economic miracle once, and we could do it again,’ ” said Russell Dalton of UC Irvine. But the past year has brought government deficits, a failure to attract buyers for many state-owned businesses and factories running at one-third capacity in the East. A Fulbright fellow in West Germany, Dalton is revising a college text on German politics. He spoke with free-lance writer Anne Michaud.

Last year at this time, one writer warned against investing in the unified Germany, saying it would face 10 years of high deficits, inflation and taxes. Another writer advised investors that the first year was the time to get in. Which was closer to the truth?

The first quote was right in that budget deficits have tripled under the Kohl government. The short-term interest rates are about 2% or 3% higher than they are in the United States. The long-term interest rates are about 1% higher. Overall, unemployment there is close to 30%.

What the second person said also somewhat fits because if you have a desire for a high return, then you look for high-risk investments that over the long run might pay off. Last year the German government had financial incentives that they’re cutting back on. If one wants to make an investment, it’s probably less risky this year.

Hasn’t the German government solved some problems for investors?

Yes. In the past, you could buy a firm, but you never knew whether somebody would come and claim the land out from underneath you. They have changed the law so that any claim will be paid off out of the monies that the government got for selling the company.

The other major problem was the environmental law. There’s a lot of pollution, and in Western legislation a new company owner would be liable for the cleanup. The government has weighted those liabilities, so that if a company invests in the East, it is no longer liable for the past 40 years of environmental damage.

You’ve said that only 5% of state-owned firms in the former East Germany have been sold. Which ones are having trouble?

The ones that they’ve had the biggest trouble selling are the large industrial chemical plants. There are some exceptions, but most of the large state-owned enterprises and heavy industries are the ones that are still going untouched.

The heavier the industry, the more it’s likely to have pollution costs involved. And the more it’s related to high technology, the less likely it is to be bought out because they’ll be behind in many areas. The investment to bring the plant up to date would cost more than building a plant up again from scratch.

What are the unsold plants doing?

The government is running them through a trust agency. They’re carrying people on the payroll in order to keep them off the unemployment line. Even in the most optimistic forecasts, something like 50% of the jobs are supposed to be redundant. But the more pragmatic estimate is two-thirds.

What could an American business investor expect from a German worker?

Well, it depends on what industry you’re dealing with. The worker costs in Germany are slightly higher than what they would be in the United States, in part because they have such an extensive social welfare system. That includes comprehensive health care, pension benefits, accident insurance and worker compensation coverage.

The second thing that will be different is that Germans have the system of co-management, co-determination. Any firm over a certain number of employees has to have a board of directors that is half made up of worker representatives and half made up of management. The Germans work on the basis of a kind of team concept.

As for training, when one generally talked about the German work force in the past, the emphasis is on highly skilled, highly trained people. The apprenticeship system is much more extensive than it is here in the United States.

The Germans also have this reputation for hard work, which is at least partially right. Although, at the same time, they get five weeks’ paid vacation a year and 11 paid holidays. So they work very hard while they’re working, but you have to get used to your workers going to Spain for a month in August.

Where are the best investment opportunities?

My sense is the best investments right now will be in retail, marketing and service industries because those areas will grow quickly. But that’s really pushing beyond what a political scientist should say.

The one thing the Germans have been very effective in doing with the East has been to develop support materials for foreign investors. Every German company that pays corporate tax has to belong to the German chamber of commerce. Through the consulate in Los Angeles or the embassies and consulates on the East Coast, the German chambers of commerce distribute information on the business climate and procedures for foreign investments.

If you were going to visit the former East Germany today versus a couple of years ago, what difference would you notice in the kinds of comforts that are available? Do you have a better hotel to stay in?

Well, if you were to travel to the five or six major industrial centers, such as Dresden or Leipzig, then you’d see big differences from, say, three years ago.

The difference is now that there are more service activities, street kiosks, street sales, street vendors. Very often those are people from the East who go to the West, get products, and then come back to the East to sell them. It’s everything from hot dog stands to shoes.

Hotels are going slowly. There are some hotels, but it’s a common story that if you walk into a hotel in the East and say, ‘I’d like a room for the night,’ they look at you like they’ve never heard of anybody who thought they could just show up and get an accommodation. It’s still undeveloped.

On uniting the two economies. . .

‘Deficits are a sign that they’re making infrastructure investments. It used to be that you could walk from East Berlin to West Berlin faster than you could telephone.’

On exports to Germany. . .

‘Germany was a major exporting nation. Now it is in a trade deficit because it has an expanded base of consumers with less productivity. They have to find some place to import from, and it could just as well be from the United

States.’

On consumer tastes. . .

‘East Germans were buying West German eggs because they were (perceived to be) better than East German eggs, but chickens are chickens. There was this burst of enthusiasm for the West.’

On the economic outlook. . .

‘The long-range forecast is much more positive than the short-range.’