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As the Berlin Wall fell in 1989 and Germany was reunified a year later, two completely different economies had to be realigned to continue to live as one country. East Germany or as once officially called, the German Democratic Republic was a communist state with a centrally planned economy, following the leadership of the USSR. East Germany was the most developed country of the Eastern Bloc in the 1980s, however, at the time of reunification, compared with its western counterpart the wealth gap was still huge. West Germany had a very strong market economy, a long list of strong, export-oriented companies with a global reach, and a very high standard of living for its citizens. As a comparison, in 1991 the GDP per capita of East Germany was $7,395 while the same figure in West Germany was around three times as much, at around $22,800.
Despite the fact that Germany has been reunited for 30 years now, a sense of division remains that becomes tangible when the hard figures are compared. The former Western German States still outperform Eastern German ones in almost all metrics. GDP per capita was $51,940 per capita in 2020 in the Western States while only c. $30,000 in the Eastern ones. Unemployment stood at 5.1 per cent in 2019 in the West vs. 7.1 per cent in the East. In the West, 18.7 per cent of full-time employees earned less than 2/3rd of the German median income, i.e. €2,284 while the same figure in the Eastern regions is 29.1 per cent – albeit down from 39.1 per cent a decade earlier. An average German had €182,000 private assets in the West but only €88,000 in the East.
This gap still exists, contrary to many positive factors that contributed to the catch-up of the former socialist country. Firstly, the Solidarity Pact, a huge program of subsidies that were aimed at pumping money to the former Eastern German states. Until 2020 – that is for three decades – practically all German taxpayers had to pay 5.5 per cent of their income and capital gains taxes as so-called ‘Soli’ or Solidarity contribution to help advance the economy of the poorer Eastern regions. The Solidarity Pact pumped between 1990 and 2010 a net worth of around €1.4 billion into the Eastern German economy. These transfers came along with the various European Union cohesion and development funds transfers that most of these regions were also eligible for.
On a map that shows the headquarters of major German companies, it is visible that practically, apart from for few exceptions, all big companies have their headquarters based in former West Germany and in Berlin – which was also ‘half West German’.
The above is another example of how detrimental communism was to the natural economic processes. East Germany had three decades of market economy, a ‘wealthy big brother’, EU membership, and funding, and yet, the convergence is still incomplete. We can however look at the same thing from another, more positive angle: convergence is on the way. Market economy and subventions work in converging poorer regions they just take an enormous amount of effort and time to materialise. As such we can expect to see further economic catch-up in former communist countries in the years to come.
Disclaimer: This article was issued by Tamas Jozsa, research analyst at Calamatta Cuschieri. For more information visit?www.cc.com.mt. The information, view, and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.
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