Ifo Viewpoint No. 3: Ten Years of Eastern German Recovery

Hans-Werner Sinn
Munich, 26 Oct. 1999

The recovery in eastern Germany has made considerable progress over the past ten years. Hourly wages have gone from one third to now more than two thirds of wages in western Germany, welfare payments surpass the GDR standard of living, and eastern German pensions are higher than those in western Germany.

However, only about two thirds of the goods and services used in eastern Germany are covered by eastern German GDP. The major portion of the consumption overhang is financed by government transfers from western Germany. Since unification, a net amount of more than a trillion deutschmarks in public funds have been transferred to eastern Germany. This amount also corresponds to the growth in the German national debt in the same period. Unification has thus been financed at the cost of future generations already heavily hit by social security burdens.

The major failing of this policy was the rapidly forced convergence of eastern German incomes. Wage harmonization was agreed before privatization had taken place and before there were eastern German enterprises that could have joined in negotiations on this point. Even without the influence of western German employers’ representatives and trade unions, wage increases would have occurred over time, but not so rapidly. Lower wages would have attracted international enterprises and enabled a speedy economic upswing. A shortage in the factor labour would ultimately also have led to an alignment of eastern and western German wages.

It is not too late, however, to ameliorate the consequences of this misguided policy. Hardship opt-out clauses from sector-wide pay agreements can enable wages to be lowered if enterprises and employees both want this. Giving eastern German employees shares in their enterprises would be a possible compensation for such pay reductions. Another option is the privatization of the still-extensive amount of municipally owned real estate for the benefit of the citizens, which would also help compensate for moderation in wage agreements.

A mixture of lower wages and co-ownership of the existing means of production is certainly more congenial to a functioning market economy than financing via handouts.


Hans-Werner Sinn
President of the Ifo Institute