THE IMPACT OF GOVERNING AND ECONOMIC INSTITUTIONS ON ENERGY SYSTEMS DEVELOPMENT: A CASE STUDY OF THE FEDERAL REPUBLIC OF GERMANY AND THE GERMAN DEMOCRATIC REPUBLIC Tracy J. Yandle* Introduction S ustainable development literature traditionally has focused on how governing and economic institutions can best facilitate an equitable distribution of the positive and negative effects of natural resource use. Much of this literature has concentrated on the selection of either appropriate economic institutions, 1 or governing institutions, 2 much of this particularly on nations that are currently in the developing stages. One reason for this focus may be the difficulty in gathering data on the development process in industrialized countries. In most highly developed nations, the transition from a feudal to an urban capitalist society (such as England and France) or from an agrarian frontier society to an urban capitalist society (such as the United States) occurred some time ago. *Tracy J. Yandle, who holds a B. A. from Franklin & Marshall College and a M. A. in environmental studies from Baylor University, is a doctoral candidate in the Joint Program in Public Policy (School of Public and Environmental Affairs/Department of Political Science) at Indiana University, Bloomington. The author is an associate instructor at Indiana University and has held research assistantships and internships at Indiana University, Baylor University, The World Bank Law Library, and the City of Waco (Texas) Planning Department. Ms. Yandle’s articles have appeared in such publications as Social Science Quarterly. An earlier version of this paper was presented at “Environmental Justice: Global Ethics for the 21st Century,” University of Melbourne, Australia October 1-3, 1997. The author would like to thank Kerry Krutilla, C. A. Yandle, and Erik Droutman for their thoughtful and valuable comments and suggestions. Any errors or omissions are the sole responsibility of the author. The Journal of Energy and Development, Vol. 24, No. 1 Copyright 1999 by the International Research Center for Energy and Economic Development (ICEED). All rights reserved. 1 2 THE JOURNAL OF ENERGY AND DEVELOPMENT The partitioning of Germany after World War II into the democratic and freemarket Federal Republic of Germany (FRG) and the more authoritarian and centrally planned German Democratic Republic (GDR) 3 offers a natural experiment. In this case, nations with similar histories and national characters experienced redevelopment under significantly different economic and governing institutions for 45 years. Both nations previously developed under the same governing model, experienced serious destruction of their industrial and economic base during the Second World War, but then had fundamentally different governmental and economic systems during post-World War II redevelopment. By comparing the redevelopment experiences in the FRG and GDR, the impact that economic and governing institutions have on development can be assessed. In this article the scope of study is limited to energy production and usage in FRG and GDR. Energy production is one of the primary tasks of development, and one of the major causes of pollution and environmental degradation. As such, it provides a useful spotlight for analyzing development issues. Two broad questions are examined. (1) How did governing institutions influence energy development in the FRG and GDR? (2) How did economic institutions influence energy development in the FRG and GDR? After briefly reviewing the relevant literature, this paper begins by providing a summary of the environmental circumstances in both FRG and GDR, then moves to the energy sector and its impact on the environment at the time of reunification (1990). Next, three historical periods of industrial development and energy use in Germany will be outlined: (a) the extent and type of industrialization and energy development that took place prior to World War II; (b) the impact of World War II; and (c) redevelopment in both FRG and GDR. The historical survey is followed by an analysis of the impact of the two distinct governing and economic institutions on the post-war energy development decisions of the FRG and GDR. This descriptive statistical analysis is based on the Economist Intelligence Unit’s 1990-1991 surveys of East and West Germany 4 and is supplemented by data from the German Institute for Economic Research. 5 [AUTHOR: CHECK ENDNOTE 5 CAREFULLY. IN CHECKING YOUR REFERENCES, IT APPEARS THAT BOTH PUBLICATIONS OF THE INSTITUTE SHOULD BE IN NOTE 5.] Finally, the importance of governing and economic institutions is placed within the larger context of sustainable development. Literature Review A good place to mark the beginning of the debate over the influence that governing and economic institutions have on the environment is Garrett Hardin’s IMPACT OF INSTITUTIONS ON ENERGY SYSTEMS 3 1968 article in which he wrote: “Each man is locked into a system that compels him to increase his herd without limit — in a world that is limited. Ruin is the destination towards which all men rush, each pursuing his own best interests. . . .”6 The solution Hardin advocated was removal of the freedom of the commons, replaced by social limitations or regulations. Essentially, he argued that people’s economic self-interests are too strong and must be overcome by the strong rule of law. He later clarified what was meant by the rule of law by stating “if ruin is to be avoided in a crowded world, people must respond to a coercive force outside their individual psyches, a ‘Leviathan’ to use Hobbes’s terms.” 7 More recently, market-based regulation has been advocated as another means to address the tragedy of the commons. Theoretically, when a government sets an acceptable level of activity, then sets market signals (such as using taxes or permit sales) at the true social cost, the market will respond accordingly. 8 But Elinor Ostrom has argued almost the opposite point, contesting the notion that privatization or government control are the “only” ways to avoid the “tragedy of the commons.” Instead, she proposes that appropriators can agree to craft new institutions that will encourage them to use resources in a renewable manner. Although these institutions will not guarantee compliance, the combination of sanctions and social pressures can result in a high, long-term compliance rate. 9 Within this context lies a debate over whether liberal democracy is more or less effective than alternative governance models in protecting the environment. Part of this debate was the focus of the winter 1995 issue of Environmental Politics. Most authors argued that liberal democracy is detrimental, at least to a certain extent, to the environment and needs adjustments such as moving toward the discursive democracy model, 10 reconciling “the anciently divided spheres of nature and culture, both in theoretical and political structures and in the culture and practice of everyday live,” 11 and extending rights to include human environmental rights and animal rights. 12 In addition to debate over governing institutions, economic institutions have received considerable attention. Examples of the pro-free-market position are found in Fred L. Smith, 13 while J. P. Barkham provides an example of the freemarket critique. 14 Denis Collins and John Barkdull summarized both sides of the debate well: Free-market advocates . . . still rely on such stratagems such as rephrasing environmental problems as economic opportunities . . . emphasizing the need to clarify property rights, encourage voluntary improvements in personal and corporate behavior, and tinkering with economic incentive systems. . . . On the other hand, many environmentalists perceive the capitalist system as the primary contributor to environmental degradation. . . . They believe at a minimum that government should restrain capitalists from exploiting and degrading the environment and at a maximum environmental protection should require abandoning capitalist economic relations altogether and revising the constitutional right to liberty. 15 4 THE JOURNAL OF ENERGY AND DEVELOPMENT Within this debate, the subfield of environmental economics is thriving, and writers such as Herman Daly are developing both theory and policy recommendations that are highly influential by integrating environmental concerns into economic analysis. 16 It is within this context of debate over the selection of economic and governing institutions that this paper examines the case of redevelopment in the FRG and GDR. This analysis may provide some insight into both the choice of economic and governing institutions and the relationship between these two institutions. Background On October 3, 1990, Germany was unified. While these two territories now had a single federal government, the more than 40 years of separate governments had created many differences between the two societies. In addition to different economic development and governing institutions, the GDR and FRG had distinct environmental problems and systems for using and generating energy. In this section, these differences are explored. Environmental Issues and Energy Systems: By 1990, the FRG and GDR faced different sets of environmental problems. The GDR confronted extensive air pollution, water pollution, soil degradation, and uranium poisoning. One 1990 report described the GDR as follows: Much of rural East Germany, land and water, is badly polluted. The visual evidence — dead trees, landscapes dredged brown in lignite dust, filthy rivers — is only part of the problem. The damage done by industrial activity has been exacerbated by East German agriculture. The effluent from mass livestock pens and the excessive use of chemical fertilizers have harmed the land and water table to such an extent that even immediate termination of these practices could not rectify the position. 17 Many of these environmental problems can be traced directly to the GDR’s inefficient energy system that, since the 1970s, had chiefly relied on domestic lignite (brown coal) for its primary energy source. Lignite has a very low energy value, high particulate emissions, and a very high sulfur content. Sulfur dioxide (SO2) produced by burning lignite (5.2 million tons in 1989) was the primary cause of acid rain. 18 Another energy-related problem is uranium poisoning, with the Wismut area heavily polluted from uranium mining. 19 Other environmental problems were caused by industry and agriculture. The Halle-Leipzig-Bitterfeld region had problems associated with industrial development, and the area surrounding Greater Mansfield had heavy metal IMPACT OF INSTITUTIONS ON ENERGY SYSTEMS 5 contamination resulting from smelting and heavy metal production. 20 Soil compaction, erosion, high chemical inputs, and loss of habitat are all associated with GDR agricultural practices. In addition, the rivers were heavily polluted with oxygen-depleting substances such as ammonia and phosphates. 21 Heavy metal and biological contamination have also been documented in GDR’s water supply. 22 As noted earlier, the GDR relied on domestically produced lignite for its primary source of energy. For example, the GDR worked on building a common power grid with both Poland and Czechoslovakia and on establishing a network of Soviet-built nuclear power plants. However, the largest source of GDR’s power was from large thermal power stations that mainly used low-grade lignite. The 1986 Chernobyl disaster confirmed the wisdom of GDR’s move away from the Soviet-designed nuclear power plants, but foreign energy sources were not a part of the replacement effort. As a result, more lignite plants and mines were planned and opened. By 1988, lignite accounted for 83 percent of GDR’s electricity production, and 74 percent of total energy production. 23 The GDR was mining 320 million tons of lignite — roughly 25 percent of global production. 24 In addition to lignite and nuclear power, the GDR imported roughly 20.5 million tons a year of oil and 6.1 million tons a year of natural gas via the CMEA [AUTHOR: WHAT IS CMEA? SPELL OUT.] pipeline. 25 Early on, the GDR did use some domestically produced hard coal (anthracite and bituminous) but these stocks were depleted by 1978; by 1987 the GDR was importing roughly 7.2 million tons of hard coal from Czechoslovakia, Poland, and the FRG. By 1989 the biggest problem (other than the environmental issues) faced by the GDR’s power industry was rapidly growing demand for subsidized state-provided energy. 26 This was addressed through techniques such as heating residential districts with the waste steam from industrial furnaces. The situation was still serious enough in 1989 that observers wrote “. . . overall the inefficient use of energy remains East Germany’s foremost energy problem, and there is unlimited scope for energy conservation.” 27 In contrast with the GDR’s lignite reserves, the FRG had few domestic energy resources. Instead, it imported most of its energy (primarily oil, which in 1988 comprised 65 percent of total energy consumption). In addition to imported oil, the FRG used some domestically produced hard coal. FRG coal mining accounted for 1.7 percent of industrial turnover and was in a long period of decline. It survived primarily due to a government subsidy of the steel industry’s consumption of domestic coal. Other domestic sources of energy included a few small natural gas and oil fields. FRG relied on these natural gas fields and imported natural gas to meet approximately one-third of its total energy needs. 28 Energy policy in the FRG over this period emphasized energy conservation. In its approach to environmental policy, the FRG primarily concentrated on air and water pollution. The FRG lowered its sulfur dioxide emissions from 3.75 6 THE JOURNAL OF ENERGY AND DEVELOPMENT million tons in 1970 to 1.0 million tons in 1989. This resulted in mean SO 2 concentrations as low as 40 micrograms per cubic meter in the FRG compared with readings of 380 micrograms per cubic meter in the GDR’s Weissenfels. 29 The FRG also placed a priority on wastewater treatment. Improvements in the biological quality of waters in the Rhine, Danube, Neckar, Main, Weser, and Leine rivers have all been noted. Although some progress was made in improving water quality, there were still significant problems resulting from storm water inflows, agricultural lands, and air-borne pollution. Additional problems for both the FRG and GDR resulted from transboundary pollution. It has been suggested that up to 30 percent of the sulfur dioxide deposited in Germany is “imported” from its neighbors. 30 Comparison of Energy Structures: 31 An analysis of gross primary energy for the FRG and GDR reveals that in 1990 the former utilized approximately 110 million tons of oil or four times as much oil as the GDR. Nonetheless, the FRG’s largest source of energy was coal (primarily lignite). A relatively small amount of electricity was produced by the GDR, compared with the FRG. Further, most of the GDR’s electricity was produced using lignite. Although gross energy consumption is higher in the FRG (see figure 1), this difference is due the FRG’s larger population. On a per-capita basis, the FRG’s primary energy source (oil) was at 1.75 tons while the GDR’s primary energy source (lignite) was a remarkably high 3.75 tons of oil equivalent (toe). This difference illustrates the FRG’s relative success in energy conservation and energy efficiency compared to the GDR’s inefficiency in the late 1980s. Another surprising result is that oil imports per capita in the FRG and GDR were fairly similar. But since oil imports were the FRG’s primary energy source and a relatively small energy source for the GDR, this similar level of oil imports may illustrate the relative difference between the amount of energy consumed by these two countries. This is difficult to confirm, however, due to the GDR’s policy of reexporting oil that had been bought at a subsidy from the Soviet Union. Additional insights can be gained by comparing the final consumption of energy in the FRG and GDR (figure 2). Overall, the FRG consumed 195.1 million toe of energy compared to the GDR’s 76.8 million toe. When gross final consumption is examined, the most energy was consumed by the FRG’s residential sector, followed by the FRG’s transportation and industrial sectors. The highest consumption in the GDR was in the industrial and residential sectors. An examination of final sectors of energy consumption also reveals the successful diversification of FRG’s industrial energy consumption among gas, coal, and electricity. But as with the energy supply, the per-capita figures provide the most important results. Overall, the FRG had a per-capita consumption of 3.19 toe IMPACT OF INSTITUTIONS ON ENERGY SYSTEMS 7 compared to the GDR’s higher consumption rate of 4.62 toe. The contrast is even more striking when individual sectors are compared (figure 3). The GDR had the highest per-capita consumption, which was fairly evenly split between the industrial (about 1.83 toe) and residential (approximately 1.76 toe) sectors. Residential consumption accounted for the largest consumption in the FRG, followed by industry and transportation. Two interesting results emerge from this comparison. First, the FRG’s residential sector (approximately 1.24 toe per capita), which was the largest consumer of energy in the FRG, ranks third in across-the-board consumption figures behind the GDR’s industrial and residential consumption. Even more interesting is a direct comparison of industrial energy consumption. The FRG’s industry used only 0.89 toe per capita, roughly 50 percent as much as the GDR’s per-capita energy consumption. This lack of energy efficiency could help explain the low levels of productivity in the GDR. It has been estimated that “production per person employed and private consumption per inhabitant [was] 50 percent behind those of the Federal Republic of Germany.” 32 More detailed information about the relative efficiency of energy use in the FRG and GDR can be obtained by calculating the amount of energy used per unit of gross domestic product (GDP). 33 In 1989 the FRG consumed 0.139 million toe per billion deutsche marks (DM) of GDP while the GDR consumed 0.424 million toe per billion DM of GDP. Thus, the FRG used about one-third of the energy the GDR required to produce a unit of GDP. This remarkable difference in energy use clearly illustrates the extent of the efficiency difference between the FRG and GDR. As the Cold War drew to a close in 1989 and 1990, the FRG and GDR found themselves in two different situations. The FRG had a cleaner and more efficient energy delivery and consumption system. The GDR had attained a greater degree of energy independence but relied on heavily polluting and lowBritish thermal unit (Btu) lignite coal. In addition, their system was characterized by massive inefficiencies and collateral environmental damages. There are several possible reasons why the FRG and GDR ended up with such disparate energy systems. By examining the history of development and postWorld War II redevelopment, informed conclusions about the establishment of the different energy systems of the FRG and GDR can be drawn. Historical Development As the only nation to industrialize under one regime yet redevelop under two starkly different regimes, Germany presents a unique case in the history of development. The country began broad industrialization in the mid-nineteenth century but suffered dramatic setbacks as a consequence of World War II. After 8 THE JOURNAL OF ENERGY AND DEVELOPMENT the Second World War, Germany was divided into the authoritarian and centrally planned GDR and the democratic and capitalist FRG. These two nations then embarked on very different development strategies for the next 40 years. By reviewing the history of this development, particularly in the energy sector, we can shed light on the impacts that these different governing and economic institutions had on both economic development and the ability of the countries to create or preserve a safe and clean environment. German Development from the Industrial Revolution to World War II: The Industrial Revolution in Germany gathered momentum in the 1830s and 1840s. Industrialization, which centered on the existing rail system with industrial hubs in cities such as Cologne and Berlin, was rapid because the country was able to draw on the experience of other nations. 34 Germany began the industrial process at roughly the same time as widespread electrification. As a result, industry was not concentrated solely in the coal regions of the Ruhr, Saar, Aachen, Lower Saxony, Cottbus (Lausitz), and Halle/Leipzig. Instead, industry developed in the traditional urban centers of Germany. Thus, the regionalization of industry and manufacturing that can be observed in England and (to a certain degree) the United States did not occur to such an extent in Germany. By 1914 Germany was an industrialized and urbanized nation. In that year, it produced 90 million metric tons of coal and 12 million metric tons of steel. However, World War I exacted a heavy toll: 2 million people died; 11 percent of production capacity was destroyed; and Germany lost 13 percent of its territory with 6 million inhabitants. In addition, Germany faced total reparation costs of 132 billion gold marks (approximately U.S. $33 billion in 1985 dollars) payable at 2 billion gold marks a year as well as 26 percent of German exports. [AUTHOR: DO YOU REALLY MEAN 2 BILLION GOLD MARKS PLUS 26 PERCENT OF THE VALUE OF GERMAN EXPORTS EACH YEAR.? FOR HOW MANY YEARS? THE LATTER IS NOT NECESSARY BUT WOULD BE OF INTEREST] These reparations, when combined with debt service from wartime deficits and the failure of the German government to stabilize economic policies, resulted in the hyperinflation of the 1920s and contributed to the economic stagnation of the early 1930s. Also during this period, parts of the Ruhr coal region were occupied by France for failure to pay reparations. 35 In 1932 German unemployment stood at 6 million, but by 1936 unemployment had dropped sharply. This was due in part to massive government spending — especially on the military — that spurred industrial activity and growth centered in the Ruhr, Berlin, and Dresden; 36 coal mining was concentrated in the Ruhr in the west and Leipzig in the east. There was little regionalization of development in the eastern or western regions of the nation. In 1945 Germany was occupied and divided into four sections under U.S., IMPACT OF INSTITUTIONS ON ENERGY SYSTEMS 9 French, British, and U.S.S.R. occupation, respectively. The U.S., French, and British sectors later merged into the FRG and the Soviet section became the GDR. The FRG had a land area of approximately 249,000 square kilometers with borders on other western European countries, Czechoslovakia, and the GDR. The GDR had a land area of approximately 108,000 square kilometers (43 percent of the FRG) with borders to the FRG and eastern European states. Post-World War II Development in the Federal Republic of Germany: At the end of World War II, the region that became the FRG sustained considerable damage. Approximately 30 percent of the housing stock was destroyed, industrial capacity was at 25 percent of 1936 levels, the transportation system was largely destroyed, and the country was occupied and under trade controls. 37 Yet by the 1960s, the FRG was again an industrial and economic powerhouse. While this recovery no doubt reflects a number of positive external influences (e.g., assistance under the Marshall Plan, relatively low defense expenditures, and membership in the Common Market), it also reflected an economic system that reduced economic controls and implemented stabilizing economic policies. After 1960 the FRG’s economy continued to grow, “overhauling its European competitors in the early 1960s.” 38 On May 24, 1949 the FRG’s Basic Law came into effect. This document defined the country’s fundamental governmental structure and specified the transition from occupation to independence. The FRG had a federal structure with 10 states (landers), [AUHTHOR: DO YOU WANT TO USE THE PLURAL IN GERMAN FOR THIS? IF SO, SHOULD IT BE länder with lände or läde as singular? I have forgotten my German.] a democratically elected parliament, administrative agencies, and independent courts. This structure provided a governance system in which the popular vote was important, with power shared between the federal government and the individual states. Compared to both previous German governments and the GDR, this system provides an open and responsive governing system with substantial power at the state level. During the FRG’s post-war economic recovery, a noteworthy transition occurred in the nation’s energy supply. In 1945 coal provided 90 percent of the FRG’s energy (including a significant amount from lignite). This dependence on coal continued until 1956 when coal production peaked in at 151 metric tons per year. After 1956 the demand for coal fell and oil consumption increased. Oil had the positive characteristics of being cheaper than coal, more transportable, cleaner, and having a higher Btu value. Although the government slowed this transition through tariffs and subsidies for coal, it did not prevent the shift. By 1966 oil surpassed coal as the primary source of energy, and by 1968 every region in the FRG had its own oil refinery. 39 According to D. Burtenshaw, by 1966 “the West German government, in common with other members of the 10 THE JOURNAL OF ENERGY AND DEVELOPMENT Organization for Economic Cooperation and Development (OECD), had endorsed the view that they would have to depend increasingly on external sources of energy, rather than maintain the indigenous coal industry.” 40 This transition away from coal was enhanced by the discovery of exploitable natural gas reserves. Nuclear power and hydroelectric power also play a small role in the FRG’s energy system. Possible explanations for this transition are explored in the analysis section of this study. Post-World War II Development in the German Democratic Republic: At the end of World War II, the GDR underwent a very different experience. It not only suffered considerable damage to its industrial, transportation, and housing base during the war but also paid severe reparations to the Soviet Union until 1953; the GDR experienced neither strong economic support nor rapid economic recovery. Immediately after the conflict, the Soviet Union began taking reparations by dismantling and removing both entire industrial plants and industrial machinery. It is estimated that the equivalent of 26 percent of the 1939 level of the GDR’s fixed assets (i.e., industrial plants) were physically removed. 41 While no estimate of the additional loss of readily movable machinery is available, the impact from the loss of this equipment is believed to be much higher than the loss of full industrial plants. Additionally, the GDR was required to make other reparation payments from 1946 until 1953. For example, between 1946 and 1948, reparation payments and occupation costs amounted to 25 percent of the GDR’s national product. It was also during this time that the GDR adopted Soviet-style central planning and nationalized its economy. Nationalization began during the Soviet occupation and continued under the new government established on October 7, 1949 when the GDR was founded and given diplomatic recognition by the Soviet Union. Under its constitution, the GDR became a “socialist planned economy” where the means of production were owned by the government or cooperatives, and all economic activity was planned by the government. The government decided how much of what commodities would be produced, at what price the product would be purchased, where it would be sent, and what workers would earn. In such a system, it was easy for production inefficiencies, subsidies, and inefficient pricing structures to be implemented. All of these had an impact on economic growth and (more importantly for this paper) the ability of the economy to adjust to new circumstances. When the GDR adopted a planned economy, it changed its industrial base as well. At the end of World War II the surviving industry in the GDR was primarily light industry, precision instruments, and optics. 42 Rather than build on these strengths, the planners concentrated on developing basic heavy industry based on the large and inefficient models and equipment from the Soviet Union. As a result of these three factors — central planning and related policies, the IMPACT OF INSTITUTIONS ON ENERGY SYSTEMS 11 abandonment of advanced industry, and reparations — the GDR experienced stagnation instead of the rapid growth of the FRG. The GDR’s history of energy development reveals that the country had no consistent energy policy other than (perhaps) using domestic resources. The GDR mined hard coal until the stocks were depleted in 1978. There was also a long public emphasis on nuclear power plants, yet only two plants were built and, after the Chernobyl accident, the public emphasis on nuclear energy was quietly dropped. The early 1970s marked a brief foray into the international energy market when the GDR expanded the proportion of imported natural gas and oil in the national energy budget as a way of promoting cleaner and more portable fuels. But this policy was abandoned after the oil price shocks of the late 1970s. The GDR then pursued a dual policy of attempting to reduce energy consumption (without raising energy prices) and of replacing imported energy with domestically produced lignite. This policy carried a range of high economic, social, and environmental costs. The government opened large open cast mines (strip mines) that required the evacuation of villages, relocation of roads, and lowering of water tables. 43 Further costs were borne when the lignite was burned, releasing high amounts of air pollution for a relatively low energy value. Analysis Germany poses a unique opportunity to study the impact of economic and governing institutions on development and environmental justice. Prior to World War II, Germany successfully made the transition to a modern industrial society. But after World War II, both the democratic and capitalist FRG and the authoritarian and centrally planned GDR faced the task of rebuilding their economies and societies. The two countries responded differently and, as a result, the divergent conditions described above existed at the time of reunification. That these two different systems and choices were imposed on similar populations with a similar industrial base allows observation of the impact of societal factors on energy production and use. The GDR’s energy system, which was dominated by domestically produced lignite, was characterized by large thermal power plants, lagging levels of efficiency, and a lack of pollution controls. In contrast, the FRG relied heavily on imported energy at world market prices, had a working policy emphasizing energy conservation, and a decentralized oil-refining and energy-distribution system. When the societal differences between the FRG and GDR are examined, some interrelated reasons for the strikingly different energy systems appear. These reasons are the different influences of economic incentives, the degree of governmental control over the economy, the effects of social freedom, and the influence of wealth on the demand for environmental amenities. 12 THE JOURNAL OF ENERGY AND DEVELOPMENT Economic Institutions: Probably one of the most striking differences between the FRG and the GDR was their economic institutions. The GDR had a classical Soviet-style centrally planned economy, while the FRG was based on a open market economy, modified by a modern social welfare system. One essential difference between these two systems is incentives for efficiency. While both countries had energy conservation policies, the FRG used energy much more efficiently. When total efficiencies of primary supply are compared, the FRG’s per-capita primary energy supply level was 33 percent that of the GDR’s per unit of GDP. One explanation for the GDR’s inefficiency was the lack of efficiency incentives. In the FRG, a company or individual using or providing energy more efficiently reaped a financial reward in the form of lower energy bills. But in the GDR, the energy producers and consumers received little or no reward for increasing efficiency (or penalty for inefficiency). In the residential sector, energy prices were kept at a constant and very low level through state subsidies (20 percent of the production cost for electricity and 25 percent of the cost for lignite briquettes) 44 and, in some cases, individual households did not even have control over the heating in their residences. In the industrial sector, there also were massively distorted energy prices, while the centrally planned economy placed an emphasis on maximizing physical outputs rather than profit maximization or cost minimization. Thus, in both the residential and industrial sectors there were little or no financial incentives to encourage conservation or efficient production. The GDR could only rely on public exhortations and centrally directed capital upgrades in an effort to increase efficiency. Further, as K. R. Mazurski noted, “in Marxist ideology natural resources are free and have no intrinsic value. Their worth is derived from the application of labor and technology; their sole purpose is to serve, not constrain, humans.” 45 It should not be surprising that under these circumstances the efficiency of energy use in the FRG was so much higher than the GDR. Moreover, the difference between the energy supplies in the FRG and GDR illustrates the influence of the different economic institutions. While the GDR predominantly relied on domestic lignite, the FRG had a more diversified and economically efficient energy system, relying on oil, natural gas, and coal. Part of this difference can be explained by the relative abundance of lignite in the GDR. But the FRG also relied on coal at the end of World War II; then, during the 1960s, it made a transition to a more diversified and efficient energy supply. This transition largely occurred due to market forces in an open economic system, despite the FRG government’s efforts to slow the transition. (R. G. Stokes demonstrates this micro-level market-based transition from coal-based to petrochemical-based technology in the FRG’s chemical industry.) 46 In 1989 the government still provided a subsidy for domestic coal, yet in spite of these IMPACT OF INSTITUTIONS ON ENERGY SYSTEMS 13 subsides very little of the FRG’s energy came from coal. Governmental control over the economy can substantially explain this difference. In the centrally planned economy of the GDR, the government could impose its lignite policy because it controlled all decision making. In the FRG, however, individual companies made decisions that determined supply and demand based on market conditions. The government could only create incentives to consume domestic coal and thus had a weaker role. This held true even during the economic shocks of the 1970s, when the FRG’s government reluctantly adopted some industry subsidies to protect industrial employment but eschewed more authoritarian interventions. 47 Essentially, in the open market of the FRG the efficiency and lower prices of imported fuel outweighed the advantage provided by the government’s coal subsidy; however, the essential characteristics of a centrally planned economy prevented individuals and groups from making similar decisions in the GDR. Governing Institutions: Just as the FRG and GDR had dramatically different economic institutions, their governing institutions were markedly different. The FRG had a democratically elected government, a relatively open society, and (by the 1970s) considerable wealth. The GDR was marked by an authoritarian and centrally managed government, a society that was closely monitored, closed borders, and (relative to Western Europe) a poor society. These governance differences together with the differences in economic policies can help to explain why the two countries’ energy systems were so different. As was previously discussed, much of the lignite extraction in the GDR came at considerable social cost. Most of the lignite mining occurred in enormous strip mines. Opening or expanding mines involved the relocation of entire towns and villages and the destruction of large amounts of land. But under the authoritarian GDR government opposition was not permitted, 48 so communities could be simply ordered to relocate. 49 Under a more open society, such as the FRG, environmentally damaging projects would often be accompanied by significant public debate, protest, and minor civil unrest. 50 Similarly, people in a more open society appear to be more likely to complain about pollution problems and environmental degradation — and receive a satisfactory response. Clearly, the social costs of energy policies were easier to ignore under a more authoritarian government than one with greater civil liberties. Another important difference between the FRG and GDR was wealth. While the FRG recovered from World War II and grew to became a post-war economic powerhouse, the GDR paid extensive reparations to the Soviet Union and stagnated under a centrally planned approach to economic management. According to Raymond Kopp, environmental amenities such as cleaner fuel and clean air are semi-public or public goods, and wide demand for these goods occurs primarily in wealthier societies — after the demand for basic private goods 14 THE JOURNAL OF ENERGY AND DEVELOPMENT has been satisfied. 51 While Kopp’s theory is focused on more traditional environmental and developmental issues (such as tropical forests and species preservation), it could also be applied to the FRG and GDR. When the timing of the FRG’s transition away from coal is examined, it roughly corresponds with the start of the FRG’s “economic miracle” of the 1960s. As income and wealth rose during this period, energy demand progressively turned to cleaner and more transportable forms of energy; as a result, the FRG moved away from coal and toward its present energy structure. But the GDR never achieved this level of wealth, so under Kopp’s model, the demand for cleaner energy and air would not have been strong. Conclusions A variety of governing and economic factors can be used to explain the difference between the energy systems of the FRG and GDR. These include the lack of efficient pricing and economic incentives for energy conservation in the GDR, the control that the government in the GDR exerted over the economy compared to the FRG, the ability of the more authoritarian GDR to minimize or ignore the social costs of its energy policy, and the demand for cleaner energy created by the increased wealth in the FRG. After World War II, the FRG and GDR adopted different governing and economic institutions and began to follow divergent paths in their redevelopment efforts. By 1990 the FRG had a strong and relatively clean economy, while the GDR languished both economically and environmentally. While the FRG did receive an initial financial boost from the Marshall Plan, it is reasonable to conclude that the choice of a free-market system in the FRG encouraged more rapid growth and a competitive energy system. The exposure to natural efficiency incentives, the global energy market, and Kopp’s wealth factor resulted in a more efficient and cleaner energy provision and delivery system. Closely linked to this competition is the freedom of thought and action that a free-market economy needs to thrive. In the FRG, the government had a policy of limited support for the domestic coal industry with assistance provided through tariffs and subsidies. In contrast, through complete governing and economic control the GDR was able to impose the use of lignite regardless of the cost. While the individuals and companies in the FRG had the freedom to reject the government subsidies in favor of oil or natural gas, the citizens of the GDR were unable to make such a choice. As a result of this lack of freedom, the government of the GDR was able to enforce an inefficient and environmentally unsound environmental policy. Basic governing and economic institutions — the broader issues of economic systems and social freedom — are not considered often in sustainable development discussions. This brief exploration of the FRG and GDR indicates that these very basic issues of governing and economic institutions have a IMPACT OF INSTITUTIONS ON ENERGY SYSTEMS 15 significant impact on the rapidity, efficiency, and cleanliness of development, particularly in the energy sector. As we continue our efforts to provide a clean and just environment, we should look beyond individual policies to the economic and governing institutions. Close attention not only to micro- but also macro-level policy and governance is vital to our understanding and achievement of just and sustainable development. NOTES 1 Recent examples include Herman E. Daly and John B. Cobb, For the Common Good: Redirecting the Economy toward Community, the Environment, and a Sustainable Future (Boston: Beacon Press, 1994); J. P. Barkham, “Environmental Needs and Social Justice,” Biodiversity and Conservation, vol. 4 (1995) [AUTHOR: Is this a periodical article, a chapter in an annual, or what? Please clarify. If a periodical, our preferred style is month or season of the issue and year rather than volume and issue number], pp. 857-68; Denis Collins and John Barkdull, “Capitalism, Environmentalism, and Mediating Structures: From Adam Smith to Stakeholder Panels,” Environmental Ethics, fall 1995, pp. 227-44; Fred L. Smith, “Sustainable Development: A Free-Market Perspective,” Boston College Environmental Affairs Law Review, winter 1994, pp. 297308. 2 See the classic article by Garrett Hardin, “The Tragedy of the Commons,” Science, [AUTHOR: Please give date of the issue, I think a monthly publication rather than volume 162] 1968, pp. 1243-248 and more recent studies, including Elinor Ostrom, Governing the Commons: The Evolution of Institutions for Collective Action (New York: Cambridge University Press, 1990); Robyn Eckersley, “Liberal Democracy and the Rights of Nature: The Struggle for Inclusion,” Environmental Politics, winter 1995, pp. 169-98; Ian Barnes, “Environment, Democracy, and Community,” Environmental Politics, winter 1995, pp. 101-33; Bronwyn M. Hayward, “The Greening of Participatory Democracy: A Reconsideration of Theory,” Environmental Politics, winter 1995, pp. 215-36. 3 In this paper, Germany refers to the combined areas of both West Germany and East Germany, while the FRG refers to West Germany and the GDR refers to East Germany. 4 The Economist Intelligence Unit Limited (EIU), East Germany Profile: 1986-87, Germany Country Profile, 1987-88, East Germany Country Report: No. 2, 1988, East Germany Country Report: No. 3, 1988, East Germany Country Report: No. 4, 1988, East Germany Country Profile: 1988-89, East Germany Country Report: No. 1, 1989, East Germany Country Profile: 1989-90, West Germany Country Profile: 1989-90, East Germany Country Report: No. 3, 1990, East Germany Country Profile: 1990-91, West Germany Country Profile: 1990-91, Germany Country Profile: 1991-92, and Germany Country Profile: 1993-94 (London: EIU, 1986, 1987, 1988, 1988, 1988, 1988, 1989, 1989, 1989, 1990, 1990 1990, 1991, and 1993, respectively). Hereafter, the Economist Intelligence Unit Limited will be cited as EIU. 5 German Institute for Economic Research, GDR and Eastern Europe—A Handbook (Aldershot, United Kingdom: Avebury, 1989 [AUTHOR: Are city of publication and publisher correct? Please check.]) and “Ostendeutschland: Die wichtigsten Daien der volkswirtschaftlich Gesamtrechnung,” June 27, 1991 (photocopy). 16 THE JOURNAL OF ENERGY AND DEVELOPMENT 6 Garrett Hardin, “The Tragedy of the Commons,” p. 1244. 7 Garrett Hardin, “Political Requirements for Preserving Our Common Heritage,” in Wildlife and America, ed. H. P. Bokaw (Washington, D.C.: Council [AUTHOR: You had Counsel but I think Council as edited is correct?] on Environmental Quality, 1978), p. 314. 8 Wilfred Beckerman, Pricing for Pollution: Market Pricing, Government Regulation, Environmental Policy (London: Institute for Economic Affairs, 1990). 9 Elinor Ostrom, op. cit. and Elinor Ostrom, James Walker, and Roy Gardner, “Covenants with and without a Sword: Self-Governance Is Possible,” American Political Science Review, June 1992, pp. 404-17. 10 Bronwyn M. Hayward, op. cit. and Ian Barnes, op. cit. 11 Val Plumwood, “Has Democracy Failed Ecology? An Ecofeminist Perspective,” Environmental Politics, winter 1995, pp. 134-68. 12 Robyn Eckersley, op. cit. 13 Fred 14 J. L. Smith, op. cit. P. Barkham, op. cit. 15 Denis Collins and John Barkdull, op. cit. 16 Herman E. Daly and John B. Cobb, op. cit. and Herman E. Daly, “Fostering Environmentally Sustainable Development: Four Parting Suggestions for the World Bank,” Ecological Economics, vol. 10 (1994) [AUTHOR: Is this a periodical or an annual? If periodical, give month or season of issue if available; if an annual, need publisher and city of publication], pp. 183-87. 17 EIU, East Germany Country Report: No. 2, 1988, p. 18. 18 Jeffrey H. Michel, “German Reunification Brings Clean-up Tasks,” Forum for Applied Research and Public Policy, winter 1991, p. 46. 19 S. A. Boehmer-Christiansen et al., “Ecological Restructuring or Environment Friendly Deindustrialization: The Fate of the East German Energy Sector and Society since 1990,” Energy Policy, April 1993, pp. 355-73. 20 Jeffrey H. Michel[AUTHOR: This author given as Michael and Michel at different places; is Michel correct as done here and elsewhere?], op. cit., p. 50. Monetary Fund (IMF), “Environmental Background Notes: Germany” (Washington, D.C.: IMF, 1992) (photocopy). 21 International 22 Jeffrey 23 EIU, H. Michel, op. cit., p. 50. East Germany Country Report: No. 1, 1989, pp. 24-25. IMPACT OF INSTITUTIONS ON ENERGY SYSTEMS 24 Jeffrey 17 H. Michel, op. cit., p. 45. 25 Not all this oil was used for energy production. When oil prices were high, the GDR would export up to 13 million tons a year of oil as a means of obtaining hard currency. EIU, East Germany Country Report: No. 1, 1989, p. 23. [AUTHOR: In your original text, you used op. cit. Is this the correct source as edited?] 26 Ulf Hansen, “Restructuring the East German Energy System,” Energy Policy, [AUTHOR: Give month or season of this issue] 1996, p. 559. 27 EIU, East Germany Country Report: No. 1, 1989, pp. 23-24. [AUTHOR: You used op cit. for this citation. Is it corrected as edited?] 28 EIU, East Germany Country Profile: 1989-90, p. 22. 29 International Monetary Fund, “Environmental Background Notes: Germany.” [AUTHOR: You used International Monetary Fund, op. cit. in your original but references had two IMF publications. Is this correct?] 30 Ibid. 31 Raw data for this section were taken from the EIU, West Germany County Profile: 1990-1991 and East Germany Country Profile: 1990-91, which also provided 1989 data. 32 Doris 33 See Cornelsen, “Survey,” in GDR and Eastern Europe— A Handbook, p. 3. the Appendix for further information on the calculation discussed in this paragraph. 34 D. Burtenshaw, Economic Geography of West Germany (London: Macmillan Education Ltd., 1974), p. 2. [AUTHOR: Is the publisher Macmillan as edited here or Macmillian as you used?] 35 Robert O. Paxton, Europe in the 20th Century (New York: Harcourt Brace Jovanovich, 1985), pp. 228-29. 36 Military 37 D. Burtenshaw, op. cit., p. 6. 38 EIU, 39 D. spending was 60 percent of the 1938 budget and 21 percent of GNP. Ibid., p. 340. Germany Country Profile: 1991-92, p. 6. Burtenshaw, op. cit., pp. 65-68. 40 Ibid., p. 72. 41 Doris Cornelsen, “Survey,” p. 6. [AUTHOR: Is “Survey” the correct chapter for this source? I went by the page number as a guess.] 42 Ibid., p. 5. 18 THE JOURNAL OF ENERGY AND DEVELOPMENT 43 Jochen Bethkenhagen, “The Energy Industry,” in GDR and Eastern Europe—A Handbook, pp. 63-70. 44 Carsten Salander, “The Energy System in the Five New Länder of Germany,” Modern Power Systems, June 1991, p. 27. 45 Krzysztof R. Mazurski, “Communism and the Environment,” Forum for Applied Research and Public Policy, winter 1991, p. 39. 46 Raymond G. Stokes, Opting for Oil: The Political Economy of Technological Change in the West German Chemical Industry, 1945-1961 (New York: Cambridge University Press, 1994.) 47 Klaus Werner Schatz and Frank Wolter, Structural Adjustment in the Federal Republic of Germany (Geneva: International Labor Office, 1987). 48 Krzysztof 49 Jochen R. Mazurski, op. cit., p. 40. Bethkenhagen, op. cit., p. 63. 50 Raymond H. Dominick, III, The Environmental Movement in Germany: Prophets and Pioneers, 1871 - 1971 (Bloomington, Indiana: Indiana University Press, 1992). J. Kopp, “The Role of Natural Assets in Economic Development,” Resources, winter 1992, pp. 7-10. 51 Raymond [AUTHOR: In the works cited with your original manuscript, several references were not noted in the text. This included that by Lothar Gerecke (1974), International Monetary Fund’s International Financial Statistics, Barbara Lippert et al. (1993). If you want these works included, please note where they should go in the text. Also, we certain to use our style of citation.] Appendix Energy Productivity Calculations Domestic Product of the German Democratic Republic (GDR) Gross domestic product (GDP) figures for the German Democratic Republic are not readily available as the GDR maintained information on net material product (NP) instead of gross national product (GNP) or GDP. There are enough substantive differences between NP and GDP that the two measures cannot be used interchangeably. An informal estimate of the 1990 GDP for the GDR was obtained from Deutsches Institut für Wirtschaftsforschung (German Institute for Economic Research), which also provided an estimate of the percent change in GDP from 1989 to 1990. 1 The 1990 GDP was estimated at 238.5 billion deutsche marks (DM), representing a 16-percent decrease from 1989 levels. The 1990 GDP was divided by 0.84 (1 - decrease in GDP) to obtain the 1989 GDP of 283.93 billion DM. IMPACT OF INSTITUTIONS ON ENERGY SYSTEMS 19 Energy Productivity Energy use per unit of GDP (E-GDP) was calculated by dividing total primary energy supply by GDP. (For example, the 1989 GDP of the Federal Republic of Germany was 2,224.4 billion DM, and 1989 primary energy supply was 310.9. When total primary energy supply is divided by GDP, the result is 0.139 million tons of oil equivalent per billion DM of GDP). This number represented the efficiency of the economy in using energy; the smaller the number, the more efficient the economy. After calculating E-GDP, the relative efficiency of the two economies was calculated by dividing the FRG’s E-GDP by the GDR’s E-GDP. This calculation revealed that the FRG used approximately 33 percent of the energy the GDR used to produce a unit of GDP. A more detailed analysis of energy productivity (such as comparisons of productivity in the industrial or residential sectors) could not be produced because comparable sectors or definitions of sectors could not be found for the energy and economic data. NOTE Institute for Economic Research, GDR and Eastern Europe — A Handbook (Aldershot, United Kingdom: Avebury, 1989) and “Ostedeutschland: Die wichtigsten Daien der volkswirtschaftlichen Gesamtrechnung,” June 27, 1991 (photocopy). [AUTHOR: Is this the correct citation? Also, are the city of publication and publisher correct?] 1 German