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9 The Reunification of Germany
THE GERMAN TRANSFORMATION
The last years of the 1980s saw the collapse of Soviet-style planning throughout Eastern Europe and movement toward a
market economy. From the outset it was clear that most socialist economies faced considerable difficulty in moving to a
market system and integrating into the world economy,1 but East Germany was seen by most as having the best chance of a
smooth transition. However, more than a decade after the fall of the Berlin Wall, the economy of eastern Germany remains in
the doldrums. In the spring of 1998, unemployment in the ‘New Federal States’ amounted to 1,405,000, and a further 305,000
were only working as a result of federally financed job creation schemes. (Another 350,000 commuted daily to work in the
former Federal Republic of Germany [FRG].) Conventional measures of unemployment put the eastern German rate at about
19 percent, more than twice the 9.1 percent of western Germany. If adjustment is made for the make-work programs, the rate
was closer to 23 percent.
A catching-up process had been anticipated at the fall of the Wall, and there was some evidence of this for the first five
years after reunification, when output in the east rose and unemployment actually fell from the level immediately after
reunification. In 1995, however, the process began to stall, and by 1998 a working party of the German Economic Research
Institutes concluded that
the ‘catching up’ process in East Germany rapidly ground to a halt [after 1995]. In 1996 the rate of growth of the new federal states
was, at just under 2 percent, still marginally higher than in West Germany; already by 1997 it was lagging behind the West German
result at just 1.6 percent, and no fundamental change can be expected either in the current or the coming year. In per capita terms,
nominal value added in East Germany remains at less than 57 percent of the West German level. Productivity has so far risen to only 60
percent of the West German level. Labor costs per employee in the current year represent just under 75 percent of the average figure
paid in West Germany.2
Given the high hopes for the East German economy at the outset of reunification, these developments raise fundamental
issues about the process of economic transformation and lessons learned from the German experience that might be applied to
other nations further to the east.
THE EAST GERMAN PERFORMANCE UNDER COMMUNISM
In the context of the Soviet bloc, the German Democratic Republic (GDR) was a very successful economy. Living standards
were above any other centrally planned state, and productivity in industry and agriculture was believed to be the highest in the
Soviet bloc. Estimates of income per head are generally unreliable for centrally planned economies, but, as shown by Table
9.1, in 1989 the United Nations put real purchasing power parity income per head in the GDR at about $8,000 per annum.
This was some 25 percent above that of the Soviet Union, roughly comparable to Ireland and Spain, and higher than either
Portugal or Greece, though considerably below the $14,730 recorded for West Germany. The GDR also stood up very well on
many other measures, particularly basic indicators of social well-being. In educational attainment, life expectancy, and infant
mortality, East Germany performed as well as many of the Western industrialized economies. In addition, its distribution of
income was considerably more uniform than that in the West,3 usually considered a positive feature of an economic system.
These achievements are especially impressive in the light of East Germany’s late start on postwar recovery relative to the
West. As early as 1948 the Marshall plan led to a sharp injection of funds into the Federal Republic, with a salutary impact on
growth, but at the same time in the East the Soviet Union was hindering recovery in the GDR by removing plant and
equipment as part of a scheme of war reparation. The strong performance in the face of handicaps led supporters of central
planning to see the East German experience as a positive model of the potential of socialism, but it was hard to discount the
persistently unfavorable comparison of material standards between East and West Germany. The physical division of Berlin
by the Wall (built to prevent population from escaping to the West) and the obviously greater prosperity of the FRG were
persistent problems. Moreover, the accessibility of information from the West was a factor in maintaining discontent in the
East.
Political and Economic Unification
After the fall of the Wall, the reunification of Germany took place in two steps. On July 1, 1990, a monetary, economic, and
social union took effect, followed on October 3 by a political union. The decisive features of the economic and social union
were the following:
The adoption of a 1:1 exchange rate between the East German mark (the Ostmark) and the Deutschmark for all wages,
prices, pensions, and so on
The conversion of most monetary assets at a rate of 2:1, except for a quota of personal savings, which was converted at
1:1
The creation of a common legal and regulatory environment based on West German laws
The introduction of the main features of the West German social market economy, including collective wage
negotiation, extensive social insurance, and active worker involvement in company management
EAST GERMANY’S ADVANTAGES
Hopes for a seamless and rapid transition were high and rested mainly on two factors. The first was the apparent strength of
the East German economy, with higher productivity and greater efficiency than any other centrally planned state, while the
second was the belief that a ‘merger’ with an existing, strong, developed economy would be easier than ‘going it alone,’
which would have to be the case in Russia and the other former socialist states. In fact The Economist trumpeted reunification
as ‘the largest leveraged buyout in history.’ That the East German transition was far from smooth despite these advantages
gives a perspective on the immense difficulties faced by other nations in transition. 4
Legal Structure and Accounting Practice
From the moment the economic and monetary unification pact was signed, eastern Germany had in place a legal and
regulatory structure covering most aspects of business and commerce. While the absence of enforceable contracts and a
consistent code of bankruptcy law presented enormous problems for business development and deterred investment in other
formerly planned states, in Germany there was a universal commercial code. In addition, the new federal states of Germany
had the advantage of a regulatory system designed to tackle market failure due to monopoly and environmental degradation.
A further advantage lay in the existence of an established accounting system; admittedly it would take time for the East
German enterprises to adopt different accounting standards, but the model was in place with a pool of skilled workers
speaking the same language available to apply it.
Finance
Considerable advantages were also present in finance. While other transition countries had to grow a modern banking sector
from the bottom up, in Germany the sophisticated system of the federal republic simply expanded eastward as banks opened
branches in the new federal states. Moreover, newly privatized or startup companies in the east had access to the financial
institutions and the savings of the west.
Supply of Entrepreneurship
In the transition from a socialized system to a market structure, entrepreneurship and management skills are often the factors
in shortest supply. This constraint was less binding on East Germany since an inflow of qualified personnel from the west
could fill almost any gap, a process encouraged by the techniques chosen by the privatization agency, as we shall see later.
Access to Markets
The fall of communism brought with it the end of the Soviet-sponsored international trade organization, the Council for
Mutual Economic Assistance (CMEA), and this resulted in the loss of traditional export markets as managed trade between
the socialist nations collapsed. While other transitional economies had to fight for access to markets in developed countries,
firms in East Germany had immediate and unimpeded entry not only into the West German market of 80 million consumers,
but also the larger European Union (EU) market of 350 million of the world’s richest customers.
Infrastructure
Not the least of East Germany’s advantages was the willingness of the federal government to pour resources into eastern
Germany’s social and economic fabric. As in other planned economies, infastructure had suffered under socialism. Roads, a
prime example, were both underprovided and badly maintained; communications technology was out of date; the environment
had been badly abused; and housing was in short supply. Eastern Germany was fortunate that the federal German government
was prepared to close the gap and provide the basis for sustained growth. In addition, rising infrastructural investment had a
strong and positive macroeconomic impact that partially compensated for the fall of demand caused by the dislocation of
trade.
A Social Safety Net
The provisions of the monetary and economic union extended West Germany’s comprehensive social safety net to East
Germany. A common feature of the economies of all former socialist nations in the early stages of transition was a collapse of
output in the manufacturing and industrial sectors. Fear of the social unrest that might result put pressure on governments to
maintain employment in existing enterprises through subsidies and delayed industrial restructuring. East Germany had the
luxury of being able to support high unemployment and early retirement, without real fear of either extreme poverty or social
unrest.
The willingness and ability of the West German government to finance the social expenses associated with transition
should not be underestimated. As Table 9.2 shows, transfers to East Germany amounted, in 1993, to some 162 billion DM,5
roughly $100 billion at current values. This total does not include monies paid out by the EU under the social fund, nor does it
make allowance for the subsidized interest rates for investment in the new federal states. Total annual transfers have increased
steadily, and by 1998 the cumulative value of the transfers from West to East Germany amounted to more than $1 trillion.
Compared to this total, the amounts lent by the multilateral funding agencies to other nations are tiny, and no other economy
in transition can anticipate the level of fiscal support received by East Germany.
THE CURRENCY ISSUE
Choice of Exchange Rates
One of the most heated controversies concerning the union of East and West Germany concerned the choice of exchange rate,
a decision that involved both economic and political considerations. Clearly the West German D-mark was much stronger
than the East German Ostmark, but by precisely how much was difficult to determine because of the Ostmark’s controlled
convertibility. One index was the price of the D-mark on the black market, about 12 Ostmarks per D-mark. Another measure
was the rate implicit in the pricing of East German goods on world markets. The rate implied by the price structure of GDR
exports to West Germany averaged 4.4 Ostmarks per D-mark. On this evidence an appropriate policy should have been to
value the Ostmark well below the D-mark, perhaps 4 or 5 Ostmarks per D-mark. However, political pressures favored parity,
largely because wages were lower in the east than the west even when expressed in terms of their respective currencies. The
onset of economic reunification would immediately lead to West German prices being common to both economies, and if the
Ostmark was valued at a fraction of the D-mark, living standards in the east would fall at a stroke, not an auspicious start for a
political union.
Ultimately a compromise was adopted in which all current payments were converted at a 1:1 rate, while a higher rate was
used for capital accounts. For example, if a pensioner was receiving a monthly pension of 1,000 Ostmarks, then she or he
would receive in the future 1,000 D-marks. The same was true for wages, stipends, and rental agreements. However, financial
assets were converted at the more realistic rate of 2:1, with the exception of a limited amount of savings per individual, which
was allowed as a concession at a 1:1 rate. The overall average for the consolidated balance sheet of financial institutions was
roughly 1.8:1.
The Consequences of Parity
While the political considerations mandated the 1:1 current rate, the economic consequences of its adoption were close to
catastrophic. As we can see from Table 9.3, the 1:1 rate made labor in East Germany very expensive. Wages in East German
industry were about 47 percent of those in western Germany, while productivity was only around 31 percent of the West
German level. Hence unit labor costs were about 50 percent higher than in the west.6 The immediate consequence was that
goods made in the east were too expensive to find a market, either in Western Europe, or in eastern Germany itself.
Prior to the collapse of the planned Soviet-bloc trading system, the economy
of the GDR was highly export oriented, sending relatively sophisticated goods throughout Eastern Europe. These markets
evaporated with the dissolution of planned trade, while the high unit cost of East German labor made the capture of markets in
the west an impossibility. Meanwhile, West German goods flooded into the east, and the domestic demand for goods
produced in eastern Germany itself collapsed. A second effect of the exchange-rate compromise was on the balance sheets of
enterprises and banks, with financial institutions being hit very hard. A substantial part of their assets was converted at the 2:1
rate, while the bulk of liabilities were converted at 1:1, meaning that, expressed in D-marks, liabilities were greater than
assets. The choice of the 1:1 exchange rate for current transaction bore much of the blame for the initial output collapse in
eastern Germany. No doubt a lower rate for the East German mark might have maintained the competitiveness of some of
eastern Germany’s production, in the short term at least; however, much of the problem stemmed from a failure to appreciate
at the time of unification the
size of the productivity differential between east and west. It was expected that
some 70 percent of eastern German companies would make losses as a result of the 1:1 exchange rate and that 30 percent
would actually be in acute danger of going bankrupt. In reality, some 90 percent of all of eastern Germany’s enterprises were
threatened with bankruptcy.7
THE TREUHANDANSTALT
The Structure of Industry in the GDR
In common with their colleagues in other planned economies, the planners and technocrats of the GDR had placed a lot of
faith in economies of scale, and East German enterprises were large as a result. About two-thirds of the workforce was
employed in firms of more than 1,000 workers, a much higher proportion than in western industrial economies. Furthermore,
more than 50 percent worked in firms having a payroll of more than 2,500. On top of this, East German firms were organized
into groups known as combines (Kombinate), which integrated and controlled their activities. Immediately before
reunification East German industry was divided among a total of 221 combines, which together accounted for almost all
output. While the intent of the combines was to coordinate production and avoid duplication, in time many came to resemble
diversified holding companies. They had considerable monopoly power and, although subject to some planning control,
tended to impose high prices and pay inadequate attention to efficiency and quality.
In June of 1990, immediately prior to the economic and social union, all of
East Germany’s industrial assets were put into the hands of a ‘trust agency,’ the Treuhandanstalt (THA). The task of the
THA was to oversee the disposition of some 8,500 state enterprises, a broad swath of retail activity, as well as extensive
holdings of agricultural land and forest. Though based in Berlin, the THA was staffed predominantly by West Germans and
had 15 regional offices in eastern Germany empowered to dispose of enterprises of fewer than 1,500 persons.
The mandate given to the THA was to reduce the commercial activity of the state, restructure state-owned industrial
enterprises, and pass those enterprises into the private sector. The main issues for the THA were how fast it should dispose of
its massive portfolio of assets and how much reorganization to attempt before sale. One possible model was to undertake a
comprehensive restructuring of the entire economy prior to privatization and to rationalize enterprises to conform to that
structure while holding them in public ownership. However, the THA considered that such a policy was beyond its powers,
resources, and expertise. A second, more modest approach was to keep the firms under THA ownership long enough to
achieve substantial restructuring on a firm-by-firm basis. Again, that would have required a great deal of management time,
considerable investment, and the THA would have had to endure accusations from firms in the west of unfair competition
from East German enterprises operating under state subsidy.
Ultimately the THA chose to go with a strategy of speedy privatization. It adopted a slogan best translated as ‘rapid
privatization, resolute restructuring, and cautious closure’ but gave primacy to speedy divestment. This was largely because it
had more confidence in the market’s power than its own expertise to restructure enterprises. Although the expenses of
maintaining an enterprise while it was within the portfolio of the THA were regarded as a necessary evil, investment in firms
during THA stewardship was kept to a minimum.
The policy precluding substantial investment in new plant or equipment was of particular importance as it became clearer
that the existing capital stock in East Germany was physically rundown. The Federal Statistical Office estimated that in 1991
roughly 55 percent of fixed assets in manufacturing inherited from the GDR (and 75 percent of the plant and equipment) were
no longer useful. Because of its condition and because much equipment had been used to produce goods for Eastern Europe
that were not in demand in the west, the assets of the firms to be privatized were worth much less than had originally been
thought. Each firm held by the THA had to make strategic choices for the future, pare back its operations, and position itself
for restructuring. However, the THA policy was hands off in terms of management, and the THA would only make limited
investments that were investor neutral. As Martin Myant put it:
In other words decisions on basic changes in production profiles and technology were to be left to the future owners. Thus, for a long
time these companies were not allowed to invest in technological changes, even though reorientation in the market demanded just this.
This was a particularly severe handicap when set in the context of the collapse of exports to the east, the shrinking domestic sales and
the rapidly rising wage levels.8
The Strategy of Privatization
The agency decided that ‘the best way of achieving urgently needed rehabilitation in most companies [was] by gaining a new,
business-oriented owner, able to bring management skills, technology, markets, and new product.’9 This ruled out voucher
privatization, which though it would involve a change of ownership, would not result in a change in management or inflow of
capital. Initial public offerings (IPOs) used as the primary vehicle in the United Kingdom were not possible either; they
provide no injection of cash for the firm (the revenues go to the government) and management is initially unchanged. Before
IPOs are presented, potential buyers need time to appropriately evaluate the firm, and this would slow the process. Moreover,
the sale of all or even a substantial part of the East German capital stock would have put a great deal of pressure on
Germany’s capital markets. After eliminating voucher auctions and IPOs, the remaining potential strategies were auction sales
for cash among competing bidders and negotiated sales to specific purchasers, which was the means actually chosen.
Generally speaking, the buyers were companies or investment groups from outside of eastern Germany, although in some
cases a sale to management was possible if appropriate assurances about finance and technological capability were
forthcoming.
Its reliance on negotiated sales gave the THA a high degree of discretion, which became a source of considerable criticism.
Political interests came to play a large part in the disposition of assets, but since the economic well-being of whole regions
often depended on the fate of single enterprises, political lobbying was inevitable and to some extent desirable. Of more
concern were accusations that West German competitors of East German firms influenced the disposal of assets and that THA
employees and associates profited through corruption.
Despite the degree of latitude granted to the agency, privatization of large East German ventures proved difficult. In many
cases the aging capital stock, poor product line, and low labor productivity demanded the immediate closure of the firm.
Better quality and lower cost substitutes for East German products were freely available from West Germany very shortly
after the start of the reunification process, and consequently demand for East German goods fell precipitously. In some cases,
the THA did grasp the nettle and make immediate closures, including Trabant, the leading automobile manufacturer. Analysis
of the real costs of
production indicated that each underpowered two-stroke vehicle cost roughly $11,000 to produce and at best might sell for
$7,000 after extensive modifications to meet environmental standards. Consequently, the Trabant factory in Zwickau was
closed, though generous subsidies from the state government induced the establishment of a Volkswagen factory to employ
many of the Trabant workforce.
Table 9.4 gives some statistics on the record of the THA. By September of 1993 it had processed some 13,241 firms and
had fully or partially privatized about 12,000 of them.10 In revenue terms the privatization program was a great
disappointment; close to the end of the program in 1993 only some DM 44.7 billion had been raised through asset sales, about
one-fourth of the annual transfer payments to East Germany. The idea of the union as a profitable leveraged buyout
suggested by The Economist is discredited. Moreover, disappointingly few purchases involved foreign buyers, with only DM
5.3 billion coming from purchasers outside of Germany.
Table 9.4 also shows the rapid fall of industrial employment in eastern Germany. At the outset of the privatization process,
2,937,000 employees worked in companies controlled by the Treuhandanstalt. By September of 1993 this group of companies
employed only 1,177,000 persons (40 percent of the original). More than 1 3⁄4 million workers lost their jobs in closures and
restructuring orchestrated by the THA. As part of its negotiations the THA tried to get commitments from new management
about investments to be made in the enterprises and the levels of employment to be achieved. Table 20.4 gives total
commitments for employment of 1,493,000, but this proved too optimistic and was well above the level actually employed in
1993, which was 1,122,000. The THA had little power to hold a purchaser to its pledges on either labor use or capital
injection.
The THA’s problems were magnified by a recession that gripped Western Europe. Spare capacity in the west, a reluctance
of management to move east, and opposition from West German unions to the ‘export’ of jobs to the new federal states
limited interest in East German industry, and the THA strategy of finding western buyers to modernize East German industry
stalled. Meanwhile, resistance to seek the views of existing management and the preference given to sales to western buyers
over potential management ‘buyouts’ led to resentment in the east. As time went on the problems the THA was having in
disposing rapidly of its assets allowed potential buyers to become increasingly selective. Since interest wasscarce, they felt
they could improve the terms of purchase by delaying. The THA, anxious to complete its task and sensitive about criticism of
growing unemployment, felt obliged to dispose of its assets on terms increasingly favorable to the buyers.
THE IMPACT OF REUNIFICATION ON SOCIAL
CONSENSUS WITHIN GERMANY
Despite the high expectations that greeted the fall of the Berlin Wall, by the mid-1990s both West and East Germans were
disenchanted by the outcome. Westerners (Wessis) resented the increase in taxes and interest rates required to keep the East
German economy afloat, while Easterners (Ossis) bemoaned the collapse of the indigenous economy, the reduction of benefits
(which had included free day care and subsidized vacation), and the movement into East Germany of West German officials
and ‘carpet-bagging’ businesspeople.
The catching-up process has now been stalled for over five years. By 1995 productivity in the east had risen to about 60
percent of the level in the west, an impressive achievement, but one due mostly to the collapse of the enterprises with lowest
productivity. Removing those workers from the totals raised the average quite quickly, but at the cost of massive
unemployment. To further raise productivity to the western levels is much more difficult from this point since it involves
increasing the efficiency of workers now on the job. If West German labor productivity increases at an annual rate of 2
percent (quite modest by historical standards), productivity in East Germany will have to grow at over 7 percent per annum if
it is to catch up even by 2010, a date that seems impossibly far into the future. One of the difficulties in transition states has
been the expectation that living standards can adjust to western levels in short periods of time. These hopes are inevitably
disappointed, and social and political pressures increase.
The changes following the fall of the Wall irreversibly altered the East German economic system but also raised the
possibility that the strains of unification could destroy the West German system too. West Germany is regarded by its citizens
as a social market economy.11 Most of the capital is privately owned and coordination relies primarily on market principles.
The ‘social’ aspect, however, involves subjecting the market to regulation to ensure that the ‘impersonal working of the
market does not interfere with or undermine basic social needs, ranging from adequate income and health care, to organized
representation in the workplace, to comprehensive vocational training.’12
The inclusion of eastern Germany has put pressure on a ‘German model’ already somewhat beleaguered by global
competition, recession, and rising unemployment. Whereas convergence seemed a likely outcome in 1989, today many think
in terms of a mezzogiorno scenario, a reference to the income and productivity differential between northern and southern
Italy.13 In that case wide regional differences have persisted despite relatively easy labor and capital mobility and persistent
government policy aimed at closing the gap.
LESSONS FROM THE GERMAN UNIFICATION
Although Germany was a special case, there are lessons to be learned from its experience that might inform policy in other
transition economies.
(1) Currency Valuation
Some of East Germany’s problems were caused by an overvalued currency since political considerations forced parity
between the D-mark and the Ostmark. Other economies have more latitude and should balance carefully the role of a low
currency value in assisting export- and import-substituting industries against the benefits of a highly valued currency in
keeping inflation in check.
(2) Privatization
One of the desirable features of any privatization scheme should be the establishment of a sense of equity. East Germans saw
most of their capital stock given away or sold to West Germans at what seemed to be very low prices. In return they got
access to the federal social safety net, but this did not fully assuage the feeling of dispossession. Some greater involvement of
the citizens in the share capital of the privatized enterprises might have strengthened social solidarity.
(3) Market Restructuring versus
Planned Restructuring
In Germany reliance was put on the market as the agent of change, and neither the privatization agency nor the government
developed a clear blueprint of industrial structure after liberalization. Moreover, internal restructuring of firms was performed
only on the very limited basis necessary to facilitate a sale. In the disorderly conditions of an economic and political
transition, markets may not perform optimally and a more active governmental role in both macro- and micro-restructuring
might ease the process.
(4) The Time Frame
German unification represented the ultimate in ‘Big Bangs,’ since almost in an instant discretionary tools of economic policy
were swept away. The exchange rate was determined by the value of the D-mark. Tariff or quota barriers and capital controls
were not feasible; imports flooded in from the west, and prices assumed world market values. While this might be desirable in
the longer term, no authority in East Germany had any control over timing. Only the vast financial reserves of the West
German state prevented the eruption of a social crisis.
KEY TERMS AND CONCEPTS
catching-up process
Kombinat
mezzogiorno scenario
monetary, economic and social union
social safety net
Treuhandanstalt (THA)
social market economy
QUESTIONS FOR DISCUSSION
1.
2.
3.
4.
5.
How was East Germany’s economic performance relative to the rest of the Eastern bloc prior to reunification?
What were East Germany’s advantages over other potential transition states?
What was the strategy of privatization adopted by the Treuhandanstalt?
What were the issues surrounding the choice of the conversion rate for the Ostmark to the D-mark?
How successful was the THA in attracting foreign capital? Why?
RESOURCES
Web Sites
Central Bank
http://www.bundesbank.de/index_e.html
Ministry of Labor and Social Affairs
http://www.bma.de/index_gb.htm
Ministry of Finance, In German
http://www.bundesfinanzministerium.de/
Ministry of Economics and Technology
http://www.bmwi.de/
Federal Statistical Office
http://www.statistik-bund.de/e_home.htm
German Institute for Economic Research
http://smith.diw.de/
The German Embassy and Information Center
....................................
http://www.germany-info.org/f_gic/index.html
Handelsblatt—National Business Newspaper
................................
http://www.handelsblatt.de/englishsum/index.html
Berliner Morgenpost International
...................
http://www.berliner-morgenpost.de/bm/international/index.html
The German Institute for Economic Research
...................................
http://smith.diw.de/diwnew/english/DIWe.html
Business Opportunities in Germany
..............................
http://www.business-in-germany.de/Engl/index1.htm
Books and Articles
Boltho, Andrea, and Wendy Carlin. ‘Will East Germany Become a New Mezzogiorno?’ Journal of Comparative Economics 24, no. 3
(1997): 241–264.
Bos, Dieter. ‘Privatization in East Germany.’ In The Transition to Market, ed. Vito Tanzi, 202–223. Washington, D.C.: International
Monetary Fund, 1993.
Collier, Irwin L., Jr., and Horst Siebert. ‘The Economic Integration of Post-Wall Germany,’ Economic Developments and Prospects 81, no.
2 (May 1991).
Hall, John, and Udo Ludwig. ‘East Germany’s Transitional Economy.’ Challenge, September–October 1994, 26–32.
Heilemann, Ullrich, and Reimut Jochimsen. Christmas in July? The Political Economy of the German Unification Reconsidered.
Washington, D.C.: Brookings Occasional Papers, 1993.
Jones, Alun. The New Germany: A Human Geography. Chichester, West Sussex, England: John Wiley and Sons, 1994.
Myant, Martin et alia. Successful Transformations?: The Creation of Market Economies in Eastern Germany and the Czech Republic.
Brookfield, Vt.: Edward Elgar, 1996.
Owen, Robert F. ‘The Challenges of German Unification for EC Policymaking and Performance,’ American Economic Association Papers
and Proceedings 81, no. 2 (May 1991).
Siebert, Horst. ‘The Integration of Germany: Real Economic Adjustment.’ European Economic Review 35 (1991): 591–602.
Sinn, Hans-Werner. International Implications of the German Unification, Working Paper
Series, Working Paper 5839. Cambridge, Mass.: National Bureau of Economic Research, 1996.
‘Survey: Germany.’ The Economist, 21 May 1994, 1–10.
‘Survey: Germany.’ The Economist, 9 November 1996, 1–22.
‘Survey: Germany: The Berlin Republic.’ The Economist, 6 February 1999, 56.
Turner, Lowell, ed. Negotiating the New Germany: Can Social Partnership Survive? Ithaca:
ILR Press, 1997.
1However, in many quarters there was a great deal of optimism about the speed and completeness of transition. For example, in Russia a well-known report
by academician S. Shatalin was titled ‘500 Days to a Market Economy.’
2German Economic Research Institute, ‘The German Economy in the Spring of 1998.’ Accessible at http://Smith.diw.de/
3Andrew Zimbalist, Howard Sherman, and Stuart Brown, Comparing Economic Systems: A Political Economic Approach (Orlando, Fla.: Academic Press,
1984), 469.
4Total and immediate integration with the former West Germany did present some problems to East Germany as we will see. Other states were able to
protect industries in transition with trade barriers and to use currency valuation changes to absorb external shocks.
5 Heiner Flassbeck and Gustav Horn put the figure at DM 170 billion. See ‘German Unification: An Example for Korea?’ (Brookfield, UE: Dartmouth,
1996), 192.
6Unit labor costs are computed by dividing wages by productivity.
7Martin Myant et alia, Successful Transformations?: The Creation of Market Economies in Eastern Germany and the Czech Republic (Brookfield, Vt.:
Edward Elgar, 1996), 50.
8Myant, 55.
9Myant, 55.
10The number of firms in its portfolio continued to grow throughout the period of privatization because enterprises were divided in order to dispense of
them.
11See chapter 18.
12Lowell Turner, ed., Negotiating the New Germany (Ithaca: ILR Press, 1997), 3.
13See Andrea Boltho and Carlin Wendy, ‘Will East Germany Become a New Mezzogiorno?,’ Journal of Comparative Economics 24, no. 3 (1997): 249
TABLE 9.1
GNP per Head for Selected Socialist Countries, 1987 $PPP
GDR
Czech Republic
8000
7750
Soviet Union
6000
Yugoslavia
5000
Bulgaria
4750
Hungary
4500
Poland
4000
SOURCE: Human Development Report, United Nations Development Programme (New York: Oxford University Press, 1990).
TABLE 9.2
Transfers from West to East Germany, 1992–1995 (DM Million)
Financial transfers to state and local government
German Unity Fund
Central government spending arising out of unification (net)
Redistribution of VAT-receipts among federal states
1992
121.9
36.1
74.4
11.5
1993
138.5
36.4
90.7
11.4
1994
132.4
35.8
85.7
10.8
1995
163.5
—
114.5
—
—
—
—
49
New system of inter-state financial compensation
Transfers to the social insurance institutions
29.1
23.9
33.2
32
Transfers from West to East German unemployment insurance
24.6
15.1
19.3
18
Transfers from west to east pension insurance
4.5
8.8
13.9
14
Total financial transfers
151
162.4
165.6
195.5
Memo item
Borrowing by the Treuhandanstalt
29.6
38.1
37.1
—
SOURCE: Deutsches Institut für Wirtschaftsforschung, ‘The German Economy in the Spring of 1995.’ Accessible at the DIW Web page:
http://Smith.diw.de/
TABLE 9.3
Labor Productivity and Wage Cost: East German Statistics
as a Percentage of West German Totals
Gross Wage and
Salary Income
Labor
Unit
per Employee
Productivity
Labor Costs
1991
46.7
31.0
150.6
1992
60.7
43.5
139.4
1993
67.9
53.1
128.0
1994
70.5
56.0
126.0
1995
72.5
57.8
125.6
1996
73.6
59.4
123.9
1997
74.3
60.4
123.1
1998
74.8
61.0
122.7
1999
74.7
61.2
122.2
SOURCE: Deutsches Institut für Wirtschaftsforschung, ‘The German Economy in the Spring of 1998.’ Accessible at the DIW Web page:
http://Smith.diw.de/
TABLE 9.4
Change of Status in Stock of Companies Held
by the Treuhandanstalt, 1991–1993
Total portfolio of TH companies
Dissolutions/liquidations
Fully/partially privatized
Memo item:
operating units privatized
Fully reprivatized
Fully municipalized
Others
Awaiting privatization
(net holdings)
Sales revenue in billion DM
From foreigners
Investment commitments
in billion DM
January 1991
Absolute
%
8489
100
120
1.4
574
6.8
107
40
7648
44.5
1.3
0.5
90
December 1991
Absolute
%
10,970
100
1,014
9.2
2,996
27.3
(1,895)
527
145
160
4.8
1.3
1.5
6,128
55.9
114.2
December 1992
Absolute
%
12,599
100
2,534
20.1
5,456
43.4
(5,258)
1,188
253
593
2,575
40.1
169.5
9.4
2
4.7
20.4
September 1993
Absolute
%
13,241
100
3,374
25.5
5,998
45.3
(6,823)
1,511
259
854
1,254
44.7
5.3
182.4
11.4
2
6.4
9.4
From foreigners
17
19.9
Employment commitments
in units of 1,000
255
930
1,401
1,493
From foreigners
121
145
Employees in units of 1,000
In TH companies
2,937
1,372
408
213
In ex-TH companies
285
1,047
964
Total employees
2,937
1,657
1,455
1,177
SOURCE: Heiner Flassbeck and Gustav Horn, German Unification: An Example for Korea? (Brookfield: Dartmouth, 1996), 121