Eastern Germany Still Playing Economic Catch-Up

The economic gap between eastern and western Germany is still sizeable, even 25 years after the fall of the Berlin Wall. In terms of GDP per inhabitant and productivity, eastern Germany has attained nearly three-quarters of western German levels, respectively. Since some years, the catch-up process is advancing very slowly indeed. The main reason for low productivity is the lack of highly skilled jobs. In addition, the structure of the eastern German economy is comparatively fragmented. Disposable income per inhabitant in eastern Germany is around 83 percent of the western German equivalent. This ratio has not changed substantially since the end of the 1990s. Unemployment is still relatively high in eastern Germany but, in recent years, has fallen more markedly than in western Germany. However, this is partly due to shrinking numbers of potential employees. Expectations after the fall of the Wall that the east would quickly catch up with the west in terms of economic power and living standards have not come to fruition. This conjecture was certainly exaggerated and assumed that a traditionally thinly populated region in flux could catch up with one of the best-performing economies in the world. Nevertheless, significant progress toward convergence has been made. In particular, eastern Germany had undergone successful re-industrialization. One major challenge is demographic change. The number of young employees in eastern Germany has fallen more significantly than in western Germany. In order to keep or attract skilled workers, more appealing jobs with good remuneration must be made available in eastern Germany. However, higher wages must accompany greater productivity and, in turn, this requires more intensive innovation activity.