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Transition with Insurance: German Unification Reconsidered

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  • Schrettl, Wolfram

Abstract

Transformation of the economic system involves the risk of a transitory fall in living standards. In German unification, West Germany promised to carry that risk for East Germany ("Paretian promise"), but also insisted on being paid an "insurance fee." That frequently neglected fee comprises nothing less than the bulk of East Germany's endowment, i.e. the state-owned capital and land. One share of the fee was arranged to go to the, mostly West German, previous owners, another to the public sector. The circumstances of privatizing the public sector's cut result in a third share going to the, again mostly West German, buyers and also help to explain the puzzle of wages and unemployment rising simultaneously. Some policy proposals that are now discussed amount to shifting the risk and/or the fee back to the East Germans. Although well motivated, this would violate the original terms of the unification deal. Copyright 1992 by Oxford University Press.

Suggested Citation

  • Schrettl, Wolfram, 1992. "Transition with Insurance: German Unification Reconsidered," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 8(1), pages 144-155, Spring.
    • Handle: RePEc:oup:oxford:v:8:y:1992:i:1:p:144-55
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    Cited by:

    1. Fabio Canova & Morten Ravn, 2000. "The Macroeconomic Effects of German Unification: Real Adjustments and the Welfare State," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(3), pages 423-460, July.
    2. Herbert Brücker, 1995. "Die Privatisierungs- und Sanierungsstrategie der Treuhandanstalt: eine Analyse aus transaktionskostentheoretischer Sicht," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 64(3), pages 444-460.
    3. Grabka, Markus M. & Schwarze, Johannes & Wagner, Gert G., 1999. "How Unification and Immigration Affected the German Income Distribution," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 43(4–6), pages 867-878.
    4. Paus, Eva A., 1998. "Structural adjustment and manufacturing sector competitiveness: Lessons from post-unification East Germany," World Development, Elsevier, vol. 26(10), pages 1839-1857, October.
    5. Birk, Angela, 2004. "Sequential Migration, and the German Reunification," Discussion Paper Series 26338, Hamburg Institute of International Economics.

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