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Kuczynski Prize Lecture 2007
Linz, September 13th, 2007

Jaap Sleifer

Planning Ahead and Falling Behind. The East German Economy in Comparison with West Germany 1936-2002

1. Introduction

It came to me as a big surprise that the Jury has awarded the René Kuczynski Prize to my book: Planning Ahead and Falling Behind. The East German Economy in Comparison with West Germany from 1936 to 2002. I feel honoured that the Jury chose this book, and it is a pleasure to give a lecture on this occasion – here in Linz.

I was for the first time in Berlin when I was 16 years old. It was on a journey of my secondary school, early November 1989. My first visit to East Berlin was on the 8th of November of that year. Among other things we went to the Pergamon museum. I remember that I saw a glimpse of the demonstrations.
Only one day later the Berlin Wall actually tumbled down. When I noticed, I think it was about midnight, we were in West Berlin, on the Kurfuerstendamm. I remember the celebrations, strangers hugging each-other, and the noise and smell of the East German cars – trabanten - driving there.
Friday-morning, the 10th of November, we went back to the Netherlands. The news-papers were screaming.
<Geschafft! Die Mauer ist offen.> and <Die Mauer ist weg!>
A remarkable detail is a sentence in the upper edge of the Berliner Zeitung: Historische Ausgabe zum schönsten Tag der jüngsten deutschen Geschichte.
From that date developments accelerated. My second visit to Berlin must have been in 1991, at that time East and West Germany were already united.

The experience of this historical event certainly fuelled my interest for postwar German history. My book, Planning Ahead and Falling Behind. The East German Economy in Comparison with West Germany from 1936 to 2002, looks at the economic performance of East Germany. The emphasis is on economic growth and labour productivity. It is a great pleasure to tell you more about my findings.

I will start this lecture with the “East German Puzzle”: what are the questions that we are trying to solve? Thereafter I will shortly discuss some of the new data that have been very important for my research. Finally, I will run through some points of attention for the East German economic development.

2. The East German Puzzle

Before the Second World War the East German economy had the signs of a blossoming landscape. At that time per capita national income amounted to 103 per cent of West Germany, compared to a mere 31 per cent in 1991. In the industrial sector labour productivity dropped from 91 per cent of the West German level in 1936 to merely 31 per cent in 1991. East Germany is a case of an economy that was relatively wealthy, but lost out in relatively short time.

What are the causes for the East German falling behind? Why did East Germany lose its prosperity? And, in general: what is there to learn about the causes of the wealth and poverty of nations?

The book “Planning Ahead and Falling Behind” measures the performance of the East German economy relative to that of West Germany, to shed further light on which factors were key to this process. For this purpose I made a rough periodisation of the East German falling behind. The years from 1936 to 1950; the years from 1950 to 1989; and the years from 1989 onwards.

This periodisation isolates the historical events around the Second World War and those related to the tumbling down of the Berlin Wall. The three periods correspond to three possible explanations for the East German falling behind:

a. The initial conditions in East Germany were unfavourable in comparison with West Germany;
b. The performance of the East German economy was less successful than the performance in West Germany;
c. The East German economy “mismatched” with West Germany when the two economies integrated.

3. New data

During the ‘cold war’ the countries east of the iron curtain were sometimes suspected of double book keeping in the sphere of information. It was sometimes believed that one – falsified – set of information was for the people and public, the other one was for the country’s leadership. Were the statistics that were published in the East German statistical yearbooks reliable?

Moreover, the comparison of the East and West German economy was hindered by the use of different systems for macroeconomic bookkeeping. Whereas West Germany used the system of national accounts, East Germany used the material product system. If you want to compare the economic performance of the two Germany’s you will have to account for methodological differences.

After the unification of East and West Germany the two countries got into the same statistical system. As a result during the 1990s statistics became available of the East German economy that were reliable and comparable. These figures provide a solid anchor for re-assessing the East German performance.

Perhaps less expected, after unification it was also possible to improve our insight of the East German economy in comparison with West Germany during the 1930s. After the wall came down the archives were opened up. For many years the original statistics of the German industrial census were stored in the archives of Potsdam, lying there largely untouched.

Now the documents are in the archives of Berlin-Lichterfelde. They were traced there by my promoter, prof. Fremdling, who has several recent publications using the census and who is now working on an input-output table for 1936.

The statistics of the industrial census of 1936 that I studied in Berlin-Lichterfelde are very extensive: distinguishing 300 industries and most provinces and Länder. After processing all the hand-written tables for the provinces and Länder, and adding up East and West, the census of 1936 provides a very good estimate of the two German economies before they were separated.

In short, after the unification of East Germany and West Germany, access was gained to reliable and comparable statistics for the two economies before separation and after unification. These new data provide useful anchors for re-assessing the economic performance of East Germany.

4. Initial conditions

East Germany was an economy that was relatively wealthy before the Second World War, but it lost out in relatively short time. How much was lost as early as between 1936 and 1950? It links up with debate on the causes of the East German decline: was it a bad start or was it a bad performance?

At the background stands the comparison of two entirely different economic (and political) systems. Differences between East and West; differences between communism and democracy; differences between central planning and capitalism. In practice a bad start versus a bad performance are often associated with misfortune versus misconduct.

Was East Germany worse off with its inheritance of the 1940s?

Clearly, both parts of Germany suffered huge war damage leading to a drastic fall of industrial output during the final year of the Second World War. In addition, some of the machinery in East Germany was dismantled by the Soviet Union. Whereas war damage was more or less the same in the two German economies, dismantling made the East German balance sheet unfavourable in comparison with West Germany.

In addition the Soviet Union demanded for reparations. These reparations mainly concerned deliveries out of current production, though – had indirect effects on the East German capital stock. Reparations put a heavy burden on national income, so that possibilities for investment were sharply reduced. While in the West the Marshall-aid helped to stimulate investment, in the East the institutional change towards a centrally planned economy, which involved expropriations, created a bad investment climate.

A rather different part of the explanation is that after the separation of the two German economies existing patterns of specialization were cut loose. Some industries were still dependent on deliveries from West German firms; these needed to find new suppliers for their inputs; so the division of Germany created bottlenecks in East Germany. A closer look at the industrial census of 1936 does not only reveal that such a pattern of specialization existed, it also shows that the industrial structure of West Germany was already somewhat more modern than East Germany before the Second World War. At that time the branch “basic and fabricated metal” was relatively large in West Germany and the branch “textiles and wearing apparel” was large in East Germany. Interestingly, after the division of Germany the branch “metal, machinery and transports” explained for most of the difference between East German and West German industrial labour productivity.

Leaving unaddressed the new industrial centre that was built up in East Germany during the Second World War and the outflow of highly educated people, i.e. human capital towards West Germany (while there was mass migration from Germans from all over Eastern Europe), I will now return to the question whether it was a bad start.

How do all these different developments add up? Between 1936 and 1950 the two German economies diverged. East German GDP per capita amounted to 103 percent of West Germany in 1936 and a mere 56 percent in 1950. The relative productivity worsened in agriculture, manufacturing, construction, and in transports and communication. In other words, almost every sector of the East German economy went through a relative decline in comparison with West Germany. East Germany had a bad start. However, in my view these bad initial conditions also provided a window of opportunities.

5. Performance 1950 – 1989

The East German inheritance was short of basic and fabricated metal industries. In the 1950s, building up such industries has been a priority of the regime. With the ambition to build steel industries – they should have gone to the Austrian city of Linz, where we are now.

In 1949 the first successful test of the top-blown oxygen converter took place, here in Linz. It was a major postwar invention in the making of steel. The Linz plant started in 1952 and another plant started in Donawitz. The technique still carries these Austrian cities in it’s name: the Linz Donawitz process. In comparison with older techniques the Linz-Donawitz-process saved both labour inputs and capital inputs.

Linz showed the chances for East Germany to build steel industries that were state of the art. In stead, until the 1980s, East Germany chose to rely on older techniques. I am not an expert on steelmaking, but it seems that the following factors provide some explanation.
- East Germany had a lack of human capital (know-how) to understand the significance of this invention;
- The Linz-Donawitz-process does not allow for the use of a lot of metal scrap. In the context of autarky and the cold war this was probably counted as a cost.
- Without a cost incentive the benefits of saving on labour inputs and capital inputs were simply less important.

A related industry – car making – shows clearly how the bottlenecks worked out. According to a study of Bauer, factories that could easily produce 35 cars per day (based on the available machinery) produced far less because of the lack of supplies. This also indicates some of the opportunities for high growth: solve the supplies and the machinery is already there! In West Germany – these kind of opportunities were already taken in 1948, 1949. In East Germany these were spread – throughout the 1950s.

In other words, part of the “measured” bad initial conditions relates to a slow – delayed – recovery. Vice versa, part of the high growth during the 1950s also relates to this slow recovery: think of the machinery that was already there. Having this said, I can now turn to the growth accounts from 1950 to 1989. It appears that while labour productivity declined relative to West Germany, GDP per capita remained at about 56 per cent of West Germany. This combination is marked by high labour efforts, which were manifested in the participation of women in the workforce and in the hours worked.

6. Unification and integration

Obviously there is much more to say about the 40 years of the German Democratic Republic. About the priority sectors of the regime – about international trade – about (the lack of) technological progress. However, I will now turn to the days since the “most beautiful day in recent German history”, the “schönsten Tag der jüngsten deutschen Geschichte”.

On the 9th of November East German people hoped for better days. The people who were longing to see the West also longed to buy products from the West. This is what happened in 1990 and 1991. During these two years demand for East German products dropped and East Germany fell behind even further in comparison with West Germany.

From 1991 to 1995 there was some catching up of per capita income and of labour productivity. However, there was also high unemployment. And there was quite some disappointment about the fact that convergence leveled off.

Perhaps the expectations of the early 1990s were too optimistic, almost the expectation of a miracle. Believing that once the appropriate institutions were in place – the past could be erased – and the economy would thrive as in the West. Forgetting about the processes of the integration of the markets of East and West – with competition for market shares – where new patterns of specialization emerge, where the core and periphery were newly defined and most of all, where history matters.

I cannot think of a better way to end my lecture today than with these last two words: history matters.

Thank you all for listening!