East Germany: 10 Years of Unification with a Vengeance

CAMBRIDGE: Ten years after the Berlin Wall’s collapse, Germans look at all the money spent in the East and can’t help feeling that something went wrong. So much money spent; so much more to be spent; so little to show for it! Who got it wrong, what critical decisions derailed success?

The biggest indictment of economic policy toward the former East Germany is that what cost so much delivered so little. East German productivity remains low and wage costs are formidable; unemployment is huge and runs at twice the West German rate (now historically high by the standards of postwar Germany), and that is not even counting the many make-work programs of all kinds; growth is slow and productivity slower. Basically it’s all a big and costly disappointment.

Critics of Russia’s failed transition to a market economy place much store in the failure to establish necessary legal and social institutions before letting market forces take their course. That surely cannot be the argument in East Germany – institutions arrived overnight with world class West German law, property rights and courts, public administration, banks, a capital market and, to crown it all, West German money. Overnight, the East German economy got everything economic civilization is all about.

Popular explanations for both limited success or outright failure go in two directions. The first, not very politically correct diagnoses, blames poor progress on the fact that East Germans are bad economic agents, blunted as they are by more than a half century of dictatorship. Even given a chance at first-rate capitalism, they prefer to sit the game out on the guidelines, financed by a generous safety net.