20 years of German unity - Is the East German economy still sick"?

Twenty years after the fall of the Berlin Wall, the economic situation of East Germany still seems precarious. Not only is unemployment still twice as high as in the West German states, but -after initial success- the macroeconomic convergence process also slowed down since the mid-90s. This paper shows, however, that the low overall growth rate in the East German states can be observed not despite, but because of the rapid convergence in the first years after reunification. Below the aggregate level, a “hidden” transformation is currently taking place, during which massive dislocations in the demand and production structure of the East German economy are resolved. These dislocations were the natural consequences of the fiscal and economic policy choices immediately after the reunification and could be interpreted analogously to the phenomenon of the “Dutch Disease”. A sectorally differentiated analysis of macroeconomic indicators, reveals an unbroken trend in the adjustment process of industrial productivity levels between the East and West German states. Because unit labor costs are now considerably below the West German reference value, the level of industry employment in the new states develops relatively better than in the old states. An important determinant of the catching-up process of the East German industry is the high investment in equipment and the consequential capital deepening. Although in the literature this connection between convergence and investment is occasionally put into question, a panel regression shows that a close relationship between these two variables exists. © 2010, List-Gesellschaft e.V.