Twenty Years After the Fall of the Berlin Wall

The Travails of East Germany’s Economic Transition

Charles S. Maier

When the Berlin Wall fell, twenty years ago, on 9 November 1989, many expected that the East German (German Democratic Republic - DDR) transition would be amongst the easier transitions. Unification with one of the most powerful West European economies provided it with a highly developed legal regime for private property, which other East European economies had to develop from a more rudimentary base. Within a couple of years perhaps the most highly developed and detailed regime of social welfare and protection in the West was extended to its own citizens. And yet the former GDR continued to have difficulties.

Photo: © Lehtikuva/AP
The Berlin Wall, 9 November 1989. UNU-WIDER held a conference to mark the twentieth anniversary of this historic event, to review the experiences of transition countries during the past two decades and to draw out possible lessons for the future.

This article provides a brief description of these difficulties, as they illustrate some of the core issues that characterize many economic transitions – including expectations and adjustments to a changing global reality. Indeed, the concept of transition exerts a curious perspective. It suggests a beginning and an end point, which can look relatively benign. It tends to make the observer deemphasize the pain of the process, because ultimately the pain diminishes. But to assess and understand the actual path and eventual end point, it is imperative to keep in mind the distress of the years in between – and remember this at the same time that the downfall of the former totalitarian regimes of Eastern Europe is being marked[i].

A Bloodletting of Jobs

Economically the East German transition proved far more difficult than anyone thought at the outset. The mid 1990s were perhaps the worst years of the transition. Different estimates – which are hard to reconcile – suggest that two and a half million workers lost industry jobs during the early years of the transition, approximately 60 per cent of those who had been employed in the industrial sector. During 1990-91, East German industry cut back work-time (Kurzarbeit) for 900,000 employees. Unemployment exceeded a million (after many hundreds of thousands had already moved West), and after 1992, early retirement at age 55 went into effect for perhaps 800,000; job retraining would occupy another 400,000: in effect a massive underemployment. All in all, unemployment reached 15 per cent and the total number of people who were either unemployed, early retired, employed in state-created jobs, or in retraining, totaled perhaps a third of the potentially employable – a total comparable to the great depression of the 1930s. Federal Labor Office statistics show unemployment rising to a million by mid 1991 and then continuing between 1.2 and 1.5 million through the l990s. By 1993 agriculture and forestry had fallen to one fourth its 1989 size (10 per cent of the active population), and industrial employment to one-third (out of almost half of labor force it comprised originally). A rise in construction employment of 50 per cent and of services by 40 per cent (although of a reduced overall work force) partially offset the losses. But the gains included youth entering the labor market while the losses counted a high proportion of the middle-aged, 50 years and older. Women in particular proved vulnerable to unemployment as the GDR had brought most women into the work force, but did not place them in high-status positions.

The Avant-Garde of the Newly Insecure

As with most phenomena in economic history, several explanations can and have been proposed for these transition woes. Indeed, the outcome might be thought of as over-determined. Factors alleged have included the currency settlement; the discrepancy in industrial productivity; the misconceived policies of the agency given control of the GDR’s state enterprises (the Treuhandanstalt – see below) and even the lack of entrepreneurial vigor among the East German populace.

While all these factors have been present, I think it makes most sense to attribute the lagging economic results to the failed “contextualization” of East German economic life. In effect, the former GDR (the new Bundesländer) was assigned an economic role that had little purpose and no real market demand. The strengths its economy did offer – networks of productive capacity – may have been effectively dismembered by the strategy of selling industrial components individually. In the latter regard, soon after November 1989, a Trusteeship Institution or holding company (the Treuhandanstalt) was formed to take over the state property of the GDR. For a brief while the Treuhand was one of the largest property owners of the world and employed 4 million workers. It took over 8,000 units, reorganized them for sale into 12,350, sold about 8,400, liquidated 3,700 and transferred the remaining hard-to-dispose firms into a successor agency.

The problem was that the GDRs major specializations, heavy industry and chemicals were oriented toward the Council for Mutual Economic Assistance (CMEA) markets (the CMEA was founded in 1949 amongst the Soviet Union, Bulgaria, Czechoslovakia, Hungary, Poland and Romania). But after 1989 the CMEA was being pried apart as a zone of economic exchange: each of its European components was being left to make its own arrangements with the West. And what East Germany could offer no longer had a role for western producers or markets. Moreover, what East Germany produced, brought with it particular ecological vulnerabilities, since the country’s major domestic fuel was lignite or brown-coal, a particularly sooty fuel with two sevenths the thermal output of equivalent weights of hard coal. Further, as part of the CMEA as a whole, it lagged in such post-modern goods as computers, and indeed post-industrial services and consumer items in general. Like an old car, which might still serve well in a Third World milieu, the GDR assets had value only as salvage and cannibalized parts inside the Western economy.

Hence East German production found it difficult to catch up in a unified Germany. A number of factors contributed to further diminished competitiveness.

For one, attention early on was focused on the setting of the exchange rate of the two German currencies at the ratio of 1:1, at a time the East German currency possessed perhaps one quarter or one fifth the purchasing power of the West German Deutschmark in any international standard of comparison. This decision, which was politically motivated, and for which many good reasons can be given, supposedly made the wage costs of GDR industries unsustainable. In addition, West German unions, which largely took over the wage bargaining in the East, pressed for a rapid convergence of East German pay scales, which far exceeded the convergence of labor productivity rates.

Second, the West German old age pension insurance system was extended to the East in August 1991. The result was to make East German pensions on average 15 per cent higher than Western pensions, in part because the GDR had virtually no unemployment and far more continuous women’s employment.

Third, the challenges of the world market did not hit Eastern Germany alone. The mid-1990s brought a reconsideration of the German Sozialstaat in general as the impact of globalization really began to strike home. The German social system rested on high social costs that employers had to cover such that the cost of hiring a worker might be twice that of his or her wage. Unions and councils bargained closely with employer associations and provided high-quality labor in return for wage and social guarantees. (Modell Deutschland). Recent investigations have even suggested that the federal government may have subsidized too much innovation among the small and medium East German manufacturing firms for their own good. Germany had an enviable apprenticeship system that produced lifetime workers with high qualifications in diverse branches of industry, but not a labor force that might be moved with alacrity to new sectors. The whole notion of Germany as a territory on which German products were produced, investment took place and the economy was territorially based (Standort Deutschland) came into question.  The key to “reform” would have to come at the expense of this humane but stodgy labor partnership, and as usual at the cost of earlier labor acquisitions. Given the strength of unions and the Social Democratic Party, resistance was to be anticipated – but resistance, too, from the socially minded wing of the CDU under Norbert Blum, who was strikingly successful in winning continued social payments for the East. By the late l990s one talked of the Reformstau in Germany – the blocked reforms or the “gridlock” that Americans refer to.

In Germany as a whole a different sort of labor market started to emerge – in part because the growing number of immigrant workers offered a more disposable labor force. By the early years of the current decade, the long-term unemployment insurance was cut back (Hartz IV), and layoffs became more possible. German constitutional court decisions made strikes riskier for the unions, not only in a given factory, but within whole sectors. The upshot was, as it tended to be in many other economies, a segmentation of the labor force. Migrants and low-wage workers increasingly formed the “disposable” sector that could be expanded or contracted, while the core skilled workers, who formed the core of the SPD, remained relatively protected. Still, in effect, looking back the East German work force might be deemed to have served as the avant-garde of the newly insecure.

Consequently, the new Bundesländer were too protected to serve as a site for outsourcing from the West, as Slovak and Hungarian industries might be, but not so efficient as to become part of the productive German core, which still ran along the Rhine river from Baden Wurttemberg north toward a restructured Ruhr and with a new center of gravity in Bavaria. Ultimately the safety net of the West German economic system may have contributed to the East Germans’ prolonged laggardness. West German firms seeking to outsource industrial assembly, for instance, did not find it profitable to settle down in East German factories, which had become as expensive as their own. It made more sense to establish their suppliers in Hungary or Slovakia, which they could rapidly reach by rail and road and whose wage costs were lower.

Assessment and Concluding Remarks

East Germans took their political future in their hands in the fall of l989. They can be proud of finally contributing to the downfall of the regime that walled them in. But they also faced formidable difficulties as this article shows. In essence East Germany can be said to have faced a dual transition: one to capitalism, the second to the post-industrial economy that had taken hold in the non-socialist world, while they remained in their collectivist CMEA cocoon. Ultimately, the region had to undergo the transition from an old industrial society to a post-industrial society in a far more compressed time period than other regions.

Moreover, in a sense the world the East Germans contracted to join was not the one they found. Bärbel Bohley, a dissident leader, had said, ‘We wanted justice and got the Rechststaat’. The East German population similarly wanted welfare capitalism, but got what they saw as neo-liberalism. It was not necessarily a bad deal, but they found it a disquieting one. Indeed, East Germans sometimes developed a schizophrenic view of what they went through. On the one hand, they suggested that their former state had exerted a degree of totalitarian surveillance through the Stasi that was as evil as the Third Reich. On the other hand, they spoke warmly of the cozy collective mentality they enjoyed, their associative life, the absence of an “elbow” society, and they threw a warm veil of sentiment over the old days. Their more ambitious young people, however, understood that they now enjoyed opportunities and freedom their parents never had during the two generations of state socialism.

[i] Note: I have borrowed the statistics used in this article from the most recent discussion of the East German transition:  Karl-Heinz Pacqué,  Die Bilanz: Eine wirtschaftliche Analyse der  Deutschen Einheit (Munich: Carl Hanser Verlag, 2009). 

About the author

Charles S. Maier
Charles S. Maier

Charles S. Maier is Leverett Saltonstall Professor of History at Harvard University. This article is based on his paper ‘The Travails of Unification: East Germany’s Economic Transition since 1989’, which was presented at the UNU-WIDER Conference ‘Reflections on Transition: Twenty Years after the Fall of the Berlin Wall’, held in Helsinki, Finland, 18 September 2009.

WIDER Angle newsletter, November 2009
ISSN 1238-9544