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Ways of the World

Carol Stone, business economist & active Episcopalian, brings you "Ways of the World". Exploring business & consumers & stewardship, we'll discuss everyday issues: kids & finances, gas prices, & some larger issues: what if foreigners start dumping our debt? And so on. We can provide answers & seek out sources for others. We'll talk about current events & perhaps get different perspectives from what the media says. Write to Carol. Let her know what's important to you:

Tuesday, November 10, 2009

The Fall of the Berlin Wall: the Morning After

In my old job, I got up each weekday morning and put on the TV to catch the early news of whatever had transpired in foreign markets and politics overnight, so I'd be "tuned in" to the latest events when I arrived at work. So the morning of November 10, 1989, I put on the TV and shook my head at what I saw. The picture was live and it showed people dancing on top of the Berlin Wall. For some days, we'd seen and been amazed by video of trainloads of people going from East to West in other parts of Central Europe. But here was the crowning touch, the Fall of the Wall; it had happened Thursday evening, and by midday Friday, when I saw it in the New York morning, many people were still there partying.

Numerous news sources this week are commemorating the 20th Anniversary of these earth-shaking events. Rather than summarize them here, we would simply point you, in particular, to the current issue of The Economist magazine (November 7-13, 2009). This UK-Europe-centered publication features the event on its cover and has several informative articles. For bibliophiles like ourselves, the collection of book review-lets are fascinating; the first recommendation is not a new book at all, but Solzhenitsyn's In the First Circle, a strong, "dark" reminder of life under Communism – "at its Stalinist peak: all-pervasive, paranoid, oppressive, incompetent, lethal" (page 76). This has just been republished in a new edition, which includes additional text originally "self-censored" by Solzhenitsyn in 1968 in an unavailing effort to get the work published inside the Soviet Union. We also suggest the Economist's website,, and the Wall Street Journal's site,, both of which reproduce articles they published in the moment in 1989.

One of the Wall Street Journal's current stories tells about a German restaurateur who then owned a McDonald's in Hof, West Germany, in Bavaria, just across from the East German province of Sachsen. People driving out of East Germany on November 10 stopped at his establishment, one of the prime symbols of western capitalism. He ran out of food in just a few hours. Mr. Rader realized at once that he could expand into the nearly virgin East German territory, where all those people were clearly hungry for McDonald's. He is now a partner in a chain of Italian eateries in a number of cities, including London and Washington.

Prosperity Lags in Former East Germany
This is an example of a western entrepreneur invading formerly Communist territory. But what about the people of those Communist regions? The evidence on their prosperity is, well, mixed. How are they doing, free of their Communist shackles? First, in sheer numbers, the trend in population has been uneven. At the end of 1988, there were 16,675,000 East Germans. By the end of 1989, there were 16,434,000, indicating that nearly a quarter of a million left as soon as the gates were opened. The population declined every single year through 2000, reaching 15,120,000 (excluding Berlin). Not surprisingly, the population of West Germany rose, and by even more than the decline in East Germany. Obviously, there were immigrants from other post-Communist regions as well. [All these data are from the German Federal Statistical Office. All references to "East" and "West" refer, of course, to the territories before 1990's formal Reunification.]

A declining population is not a particularly good sign. Neither is the amount of unemployment, which remains elevated in the former East territory. In 1990, according to the German Federal Employment Agency, unemployment in that region was 10.2%. As poorly run, noncompetitive companies closed there, unemployment surged immediately and continued climbing, peaking at 20.6% in 2005. By contrast, the 2005 rate in the West was 11.0%. Since then rates in both sectors have come down, but that in the East, 11.8%, remains notably higher than in the West, 6.6%.

Similarly, wage comparisons in the East continue to lag as well. Reported average wages and other income measures improved sharply compared to West German wages during the first few years after the Wall fell, but have stagnated since about 1996. East German workers earned about one-half of the hourly wage of West Germans in 1990-1992. This ratio rose quickly to 70-74% over the next five years, but the comparison has changed little since then. East Germans' relative welfare increased some, but it is far from converging with that of West Germans, making a major goal of reunification elusive.

Those Who Leave the East Do Better
This picture looks discouraging, but other factors come to bear and hearten our interpretation. A number of scholars[1] help us understand that, as we might think, labor and work were organized very differently in the two Germanys. East German workers were far less productive than those in the West, justifying the initial wage differential. The transition in the economic structures, which is clearly still in process, should be expected to be uneven and lengthy. As noted, non-competitive plants and companies in the East have closed, throwing huge numbers of people out of work. And many good workers left East Germany when the wall came down and they were able to go.

This last sentence is not meant as a throw-away line or excuse. Workers "left" the East German labor force in two ways. They actually moved to West Germany or they took jobs there and have been commuting. In both cases, their earning power has increased more than workers who stayed in the East zone. Indeed, some statisticians refer to these groups as "movers" and "stayers". The movers and commuters have done much better: they earn an average of 85% as much as West German "natives", with many of the movers reaching par, particularly when their age, educational and experiential backgrounds are similar.

Desire for Government Support Greater in East
What we are left with then in explaining differences in workers' prosperity is a cultural environment that still overhangs the Eastern region. The workers who have moved are notably younger than those who have stayed; in 2005, the age difference was almost five years, 37 versus 42, and 31% of the leavers are 30 years old or less, compared to 11-1/2% of the stayers and just under 10% of the West Germans. Many people who are likely among the most adaptable and energetic have left East Germany. Those who remain are older; just because of their age, they are more accustomed to the governance style of the Communist regime. Work by Harvard economists Alesina and Fuchs-Schundeln[2] highlights two manifestations of this mindset. People in the East tend to believe government should have more responsibility for individuals' financial security and they also believe that what happens in life is caused more by social conditions and less by one's own efforts.

Alesina and Fuchs-Schundeln examine survey results from the German Socioeconomic Panel (GSOEP), which is compiled annually by the German Institute for Economic Research. The term "panel" means that many of the same people participate year after year so changes in their life situations can be documented. Every five years, the survey includes questions about policies on "financial security". Who should be responsible for citizens' financial security in the event of unemployment, illness, etc? Should it be solely the government or solely private resources or some combination? Personal information is collected about the respondents: age, where they live, where they have lived before, what their income is and what their major sources of income are, and so on. These data make it straightforward to differentiate between people who are from the former West and East Germanys.

The GSOEP questions cover the desire for government support in response to conditions of unemployment, illness, family welfare in general, old age and "needing care". On average in 1997, 42% of West Germans believed government should be mainly responsible for "financial security" in these situations; this portion edged up to 43.7% in 2002. Only support for unemployment was favored by more than half the West Germans. East Germans, on the other hand, argued for government support 58.7% of the time in 1997; all the items except "family welfare" garnered well over half yes-votes and the family welfare number was just below half, at 49.1%. By 2002, however, this pattern had changed. The overall government-leaning decreased to 55.1%, and the decline showed in all five topics. So an attitudinal change was already evident in 2002. The authors extrapolate the size of the change over the five years and conclude that it would still take well over 20 years for East German readings to converge with those in the West.

Older Easterners Perceive a Rigid Class Structure
People's motivation in the East is hampered by a basic sense of society's structure. Seventy-two percent believed in 1997 that the possibilities one has in life are defined by social standing. The frequency of this response in West Germany is lower, but hardly "low", at 60.4%. [We wish we had a comparable number for the U.S.] In accompanying regression analysis, Alesina and Fuchs-Schundeln check this response by age-group and find that older East Germans have stronger feelings about the role of social conditions in determining one's fortunes than do younger people. In the West, there is no statistically distinguishable effect of age. So these analysts conclude that there is a strong, penetrating effect on one's psyche for having been subjected to 45 years of Communism, and the longer you lived that way, the deeper the feeling goes. Younger people have had an easier time figuring out how to lift themselves up in the world rather than expecting government to maintain their welfare.

[1]Analytical articles from the German Institute of Economic Research. If you are interested, contact Carol for references.
[2]Alberto Alesina and Nicola Fuchs-Schundeln. "Good Bye Lenin (Or Not?): The Effect of Communism on People's Preferences", Cambridge, MA: National Bureau of Economic Research Working Paper 11700, October 2005. Accessed November 7, 2009.

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