One eastern German state is working hard to create an economic miracle of its own

By RICHARD HORNIK /DRESDEN

hen Peter Eichhorst's family left communist-ruled East Germany in 1960, the last thing on their minds was returning to their native land. Just a few months ago, however, Peter did just that, relocating his startup software firm from San Diego to Dresden, capital of the eastern German state of Saxony. The move had nothing to do with "Ost-algia"--a longing for the idealized, simple past of Germany's eastern regions. For Eichhorst the motivation was purely economic: "In Germany after the war we had the Wirtschaftswunder (economic miracle). It happened because the people wanted to work and because there was a lot of work to be done. We have this same spirit now in the east."

Well, in some parts of eastern Germany, anyway, particularly Saxony--or Silicon Saxony, as some of its boosters have dubbed it. High-tech firms as small as Eichhorst's Paravisio Software and as large as electronics giant Siemens have moved in the past few years to Germany's most southeasterly state. While it is easy to overstate progress--unemployment still stands at 22%--a highly skilled work force and an economically liberal state government give Saxony an advantage over other German states both east and west.

Saxony, almost half the size of Switzerland and with 4.6 million inhabitants, was one of Germany's key industrial areas in the early 19th century, when the country's first machine tool industry took root in Chemnitz, southwest of Dresden. In the first 40 years of this century, Saxony had the highest GDP in Europe, and before the collapse of communism, it produced 50% of East Germany's industrial output.

But after the Wall fell in 1989, Saxony's economy quickly disintegrated. Whole sectors had been run as clumsy, inefficient conglomerates. The chemical industry around Bitterfeld had blighted the landscape for hundreds of miles. The skies were leaden with fumes from the sulfurous lignite used to generate electricity. Autobahns were like washboards, bridges were crumbling, water and sewage services had fallen into disrepair. The telephone system had few international lines.

But then Saxony got lucky. Kurt Biedenkopf, an economist turned politician, had been interested in the region as far back as 1984 when he established an economic policy think tank with a focus on East Germany. In this capacity, Biedenkopf traveled often to Leipzig where he gained what he describes as "my first insight into the reality of how disastrous the economic situation actually was," and lectured at the university right up to the collapse of the G.D.R. in July, 1990. All these experiences contributed to a conviction that monumental structural changes were necessary to stave off disaster. In October 1990, the Saxon Christian Democratic Union invited him to be their standard-bearer in state elections, and he led his party to a 54% majority. Four years later he provided the CDU with a rare bit of good news, gaining almost two-thirds of the seats in the state assembly.

Minister-President Biedenkopf began with a simple question: "Should we copy western Germany or should we aim for 2005?" Given his concern about the toll structural rigidities were taking on the western German economy, the answer was obvious. And for all its woes, Saxony was not without some resources that could help it leapfrog to a more advanced level of economic development.

First, Saxony has four top universities and five technical colleges, part of an impressive educational tradition stretching back over several centuries. The region also benefited from the fact that the communists chose the area around Dresden as one of the main computer production centers for the entire Soviet bloc. When East German spies stole the plans for the IBM 360 in the early 1970s, the government established the Robotron works to churn out the rather clunky copies that became the computing workhorse for the Soviet empire. Although the computers they built quickly fell behind technologically, the work force at Robotron was as skilled as any in the West. "Saxony's managers may have been lousy," says Biedenkopf, "but our engineers and scientists were world-class."

Finally, the economic deprivation that accompanied the transition to democracy and capitalism engendered more flexibility in working hours and vacation time. Says Eichhorst: "In the rest of Germany, salary, working hours and vacation are the most important topics in a job interview--here they just weren't an issue. Eastern Ger-mans need jobs and are willing to work." This desire can be seen in people like Dresden taxi driver Karl-Heinz Trepte, 56. He worked in an engineering factory until mid-1996, when he took a hefty voluntary severance package. Says Trepte, "Right now is not the best of times. But people who want to work, can find work. I'm making much less than before, but that's better than sitting around at home."

This eagerness to work has also opened a crack in the united front of organized labor. In June 1996, the Association of the Saxon Metal and Electric Industry signed a collective wage agreement with the Christian Metalworkers' Union, a small rival of the mighty metalworkers' union IG Metall. That agreement envisages salaries and perks that, in total, cost employers some 10% less than provisions in the standard agreement with IG Metall. Usually these collective agreements are ignored in the east owing to the dire economic situation. This is technically illegal, but both workers and employers keep silent about it. Some economic experts estimate that due to these "house contracts," salaries in the east are not the official 85% of the western level but barely 50% to 60%.

Taking Saxony's human capital as a starting point, Biedenkopf and his economic team, headed by Labor and Economics Minister Kajo Schommer, have concentrated on improving the state's physical and administrative infrastructure. Schommer proudly notes that while other eastern German states largely used their share of the $650 billion in federal support payments for such things as income subsidies, Saxony has focused on rebuilding transport and telecommunications networks and on retraining its work force. Biedenkopf is building a world-class airport at Leipzig, which will include the largest freight center in Central Europe. He's improving highway links to Eastern Europe, which could make Saxony a regional trading center. And he even persuaded the Bundesbahn to lay tracks for a high-speed train between Leipzig and Berlin with a stop at the new airport.

This vibrancy has helped lure high-tech manufacturers, including almost 50 firms involved in the semiconductor industry. The showcase facility is the Siemens Microelectronics Center in Dresden, a state-of-the-art integrated circuit facility with 2,600 workers that occupies the site of a former Soviet army base. Andreas von Zitzewitz, president of Siemens' Memory Products Division, says Dresden's municipal bureaucracy moved at a "phenomenal speed" to issue the necessary permits. It took just 21 months to complete.

In January Siemens and Motorola, one of the world's leading computer chip makers, chose Dresden as the site for a new joint venture, called Semiconductor300, to produce a cutting-edge 300-mm silicon wafer. Its facilities, with 450 workers, are just minutes away from where AMD, America's number two chip manufacturer, is building its own semiconductor plant.

And Saxony has attracted its share of traditional industry as well. Volkswagen has installed a new plant at Mosel near Zwickau in south-western Saxony. Quelle, a mail-order marketing firm, has opened a large-scale distribution center in Leipzig and the publishing giant Bertels-mann has built a huge printing plant there.

Even Robotron has risen phoenix-like from the ashes. Peter Ade-nauer, great-nephew of post-war West Germany's first Chancellor, has taken the old East German computer combine and reinvented one operating unit as a software and services company, Robotron Projekt. The "go-get 'em" attitude of Saxony's under-25s and the modern infrastructure it now has in place give the region a leg up over the rest of the country. Says Adenauer, "It's much like West Germany was in the late '40s and early '50s. And you know what they did with this potential."

Still, no one claims Saxony will replace California's Silicon Valley nor that its unemployment will drop even to western German levels anytime soon. But the can-do approach of many Saxons stands in stark contrast to the common western German stereotype of "the Ossies who only take our money." And Wessies would do well to look at their eastern neighbors' willingness to try new ways of handling employer-labor and business-government relations. Says Biedenkopf: "We are creating an environment for invention and investment. Saxony is a state which looks forward." The rest of Germany, east and west, would do well to follow the Saxon example.

--With Reporting by Peggy Salz-Trautman and Alexandra Stiglmayer /Dresden And Bruce Van Voorst /Washington