Transition Recession
The effects of the transition in East Germany
by Ryo Shimizu
UNEMPLOYMENT AND WAGE by Hidemi Tatsumiya Goma

The effects of the transition in East Germany

by Ryo Shimizu



Since the collapse of the Soviet type economy in East Germany, market economy has found its way towards the rehabilitation of the economic depression that occurred after the "Treuhandanstalt". During that period, industries were sold for low prices and became entirely privatized during a period of only four years after the collapse. As a result, the economic structure of the former GDR has changed fundamentally towards the service sector rather than the industrial. Deficiencies remained, however, causing Germany to deal with some significantly agonizing problems which are still present today.

After the unification took place in 1990, Germany was already expecting that difficulties were about to face them. For one thing, integration into the Western economic system led to a far more dramatic collapse of the East German economy than even the pessimists had expected. In the first year of the unification, industrial production fell by a half, and GDP fell by a third. Unemployment jumped up as a result to almost a third of the entire labor force in that area. Tax increased as well, in order to support the unification and the entire economy, both in east and west, fell in a dark shadow.

The tension between them increased, because of the fact that many had negative opinions about the unification and the Treuhandanstalt. However, these are issues that are appearing in the short run. Then, if we ignore those factors, what can we expect from the German economy in the long run?

The conversion of the former east German command economy into a well-functioning market economy system is a unique challenge. It requires not only a massive transfer of resources from west to east, but a complete change of management. East Germany had a bad initiation point, since the Treuhand sold all state-owned companies for a much lower value than it was suggested, because the transition period was planned for four years only. They created a massive debt of about 300 billion DM, and caused the macroeconomics in Germany to stagger.

However, the growth rates over the past four years are showing gradual increase, although the unemployment rate still does not indicate any improvement. If we take the growth of East Germany in 1991 as 100, then the growth rates of 1996 are as follows: GDP= 139(at 1991 prices); Productivity= 220. Although there are just figures, they are absolutely encouraging for Germany and the rest of the world.

Also, many efforts has been made to increase the investment in the East German region. Although there are still many investment barriers, mainly concentrated in large cities such as Berlin, the investment rate are definitely showing improvements. At 52.5 percent, the rate of investment in eastern Germany in 1995 was much higher than during the years of West Germany's "economic miracle". Capital investment has risen rapidly (1991: DM 92 billion; 1992: DM 126 billion; 1993: DM 150 billion; 1994: DM 179 billion; 1995: DM 197 billion).

In addition, the microeconomic growth is also improving. The growth are mainly recognized in the service sector, although there is a rebound from the growth in this sector back to the industrial sector, because of two main reasons. First, East German industrial plants had to endure a major reform towards modernization that required a certain amount of time, not only to change the machines, but also to teach and specialize the employees. Secondly, there was a prevailing pattern of specialization to be noticed in the service sector; consumer-oriented services account for a much larger proportion of the total in east than in West Germany. This is where the sluggish growth of private consumption has impacted on service output. However, we can consider this as a temporary issue, hence it does not affect the growth in the economy in the long run.

Together with the industrial sector, the construction sector bloomed tremendously as well. Many buildings are still being constructed, and many are already planned for the coming years. This construction boom is most obvious in Berlin, which is planned for about 30 construction projects, making it the largest construction center in the world.

As for West Germany, the shock was not as bad as the people were expecting, because at the time of the unification, the economy was in good condition. Therefore, they were able to transfer massive amount of capital into the east, although they were faced with the debt that the Treuhand had produced, as noted earlier. As a result, income per capita inreased for the East Germans.

In the long run, these problems are tend to disappear, because people will find solutions to any problem that comes up. Germany has many strengths which should help it to overcome the problems that it faces today. Because Germany is highly developed and the currency is extremely strong, which provides the government enough confidence in their financial and economic policies at all times. Also, because Germany has heavily invested in capital, the productivity will still increase, which will result as higher GDP.

In conclusion, Germany has survived the first and the most difficult step towards a prosperous future. They suffered high unemployment rates and declining GDP. However, since Germany has one of the most powerful economy in Europe, they should be able to deal with the short term problems better than other countries. In fact they have already proved that they were able to recover from situation worse than the unification problem: devastation caused by two World Wars. In the long run, Germany should show once again a mightily fruitful economy, no matter what happens.


by Hidemi Tatsumiya Goma




Starting from 1989, East Germany experienced a rapid privatization period. It was moving from the socialist command economy to a liberalized free market economy. Government owned enterprises were transferred to private owners. The fall of the Berlin Wall in 1989 and the unification of the two Germanies in 1990 brought crucial changes in the East German Labor market. With the underdeveloped market system and backward technology the privatized enterprises had to compete in the world market. They faced twin tasks of developing a service sector from a tiny base and reducing drastically the concentration of production and employment in the public sector. (1)


One of the successes of the Soviet-type command economy was the non-existent unemployment. Due to privatization, the new open market economy had to lay off many workers. By the end of 1991, unemployment rate in East Germany was 15%. Overstaffed firms with outdated products and techniques have been unable to survive. (2) As new capital flew into East Germany, resource had to be reallocated. The outdated technology had to be replaced and the staff newly trained. Even the old buildings needed extensive adaptations as they were not suitable for modem production systems. (3) This created transitory unemployment. Firms which produced unwanted products or no longer competitive products shrunk dramatically. Most segments of GDR industry were undergoing substantial employment reductions, particularly in the consumption goods, chemicals, ship building and parts of textile and steel industry. (4). Massive unemployment was generated by those industrial sectors and agriculture which needed these new structural adjustments. In 1991 out of the total labor force of 8.8 million people 837,000 were unemployed and about 2 million were working reduced hours. (5) The fall of production created widespread layoffs. East Germany used to have 55% of its labor force in industry, while the West European countries had only 25%. Two out of seven million workers had to change their jobs and, therefore, face at least temporary unemployment. (6)

What is needed to reduce excessive transitory unemployment? Large scale job training by the government may create ‘deadweight’ loss and ‘substitution’ effects.(7) Deadweight loss would appears if resources could have been used more productively elsewhere. Substitution effect means that the newly trained workers may not do as well as the existing workers.

Thus, training is being encouraged only in the small-scale individual enterprises. So that workers can acquire specific skill needed in the particular enterprise. The workers in East Germany need additional training to cope with the transitory unemployment. They are not familiar with modem techniques of production and communication, because the new technology was not used in the old command economy.

Strong forces exist in the unified German labor market to promote wage equalization, especially for skilled and mobile workers. Labor unions are pressing for quick adjustment of wages. (8) In 1989, East Germany’s real wage was 30% compared to the developed neighbor West Germany. By early 1990’s this increased to 40%.(9) Only gradual increase in real wages was expected because of the low productivity and overemployment. Wage determination is now negotiated in each sector. Wage bargaining cannot take place in individual firms since each of them faces different problems concerning market prospects, labor costs and productivity.(lO) Labor market disequilibrium resulted in fluctuating wage rates. A greater labor market flexibility is required in the future to introduce a wage differentiation within each sectors.


East Germany with the support of Western Germany still has to decrease the number of unemployment and increase the low wages. Since the structure of the command economy was destroyed, there extensive rebuilding to be done. A lot of labor force will be needed in the newly emerging large scale industrial firms, agricultural farms, construction establisments and small privatized businesses. With a new strong base and the help of the West, Eastern Germany is rapidly catching up with the modem world.

1.  Fels, Gerhard. Schnable, Claus. The Economic Transformation of East Germany: Some Preliminary Lessons. Group of Thirty, Washington DC 1991 Pg.5

2.  Fels, Gerhard. Schnabel, Claus Pg.7

3.  RESERVE Leysen, Andre. Eastern European economics. ME Sharpe. New York 1991 pg.32

4.  FeIs, Gerhard. Schnabel,Claus pg. 10

5. Edited Ramanadham,V.V. Privatization: A Global perspective. Routledge London, New York 1993 pg. 145

6.  Leysen, andre pg.3

7.  Edited. Fischer,Georg, Standing,Guy. Structural Change in Central and Eastern Europe. Labor market and Social Policy Implications. OECD, Paris 1994 pg. 10

8.  Van Brabant,M,Josef. Remaking Eastern Europea on the Political Economy of Transition. Kluwer Academic Publishers, Dordrecht Pg.26

9.  Edited. Lipschitz, Lesie. McDonald, Donogh. German Unification Economic issues. IMF Washington DC 1990 pg.5

10.     Van Brabant,M, Josef. Pg 26



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