The East German Nature of Transition from Socialist to Capitalist (Market) Economy
Posted: 14 Nov 1998
Date Written: June 1998
Abstract
Hard currency, and high wages may not explain the slow response of the East German economy to the opportunities of western capitalism. The success of the East German transition model may lie in those sectors that pay the highest wages. This paper shows that on a more detailed manufacturing sector level, those sectors that received the bulk of western investment and management expertise, for example machinery, chemical and vehicle industries are not always the ones that had achieved the greatest advances in export competitiveness by 1995. Losses in terms of export competitiveness occurred in sectors that are relatively low-tech, and dependent on cheap labor. Strong gains in export competitiveness of the eastern region of Germany appeared in some high-technology sectors, particularly in the historic optical and precision instrument sectors. Those are also sectors which are skill intensive and command high wages. For explanation of the discovered sector patterns of export competitiveness change, the paper offers an industrial organization and trade model.
However, in East Germany most firms never got to the stage where they could effectively compete on technology due to the initial adjustment shock of unification. Those firms that did survive the first two years, due to appropriate technology management and bridge financing, were largely able to catch up with their rivals and successfully compete in export markets.
JEL Classification: O11, O52, P21
Suggested Citation: Suggested Citation