German Unification: The Economics of Transition

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Abstract
German unification Horst Siebert Political unification has provided East Germany with an institutional infrastructure and monetary stability. Now the socialist firm must transform itself. While property rights are established under German law, ownership assignment remains to be determined in a substantial number of cases. This proves to be a severe bottle-neck as Treuhand deals with the privatization of some 10,000 firms. With an equally slow pace of new firm creation, output and employment have dramtically fallen, a sharp contrast with the aftermath of the 1948 reform in West Germany. A number of reasons explain this disappointingly slow start, including the distortions inherited from the planned economy. Treuhand operates under tight political scrutiny and faces an enormously complex task. While protecting people during the transition is important, extreme care should be taken to avoid structural policies which will end up perpetuating the old economic inefficiencies. This is illustrated with two contrasted scenarios. The Mezzogiorno scenario sees political expediency standing in the way of economic reform, relying on distortionary transfers and subsidies encouraging rent-seeking activities. The new frontier scenario takes advantage of the supply shock and the increased real rate of return to build up an efficient economy.

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