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Vol 3, No 2
15 January 2001
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Ten Years
after German

Part two: Was institutional change successful?
Dr Bernhard Seliger

read part one of this series

Unexpected speed

The speed of unification was probably the most amazing feature of the German unification process. Unification experts and laymen alike were twice fooled: First, they did not expect unification to come at all until late 1989. Then, after the opening of the border in October 1989, they did not expect it to come so soon and so complete, leading to the absorption of the GDR by Western Germany in October 1990.

As in October 1989 the borders were open, soon afterwards the new prime minister of the GDR, Hans Modrow, a reform-Communist, proposed a partnership treaty to Western Germany. This was immediately answered by the ten-point plan of Helmut Kohl, Western German chancellor, who first opened a perspective for unification.

While these plans still thought about a rather distant possibility of unification, in February 1990, as Helmut Kohl was electioneering in Eastern Germany for the first free parliament Volkskammer, he offered a single currency area to the GDR. This proposal, immediately greeted with enthusiasm by the Eastern German people, was the beginning of a massive program of institutional transfer and considerably sped up the unification process.

After the landslide victory of the conservative, pro-unification "Alliance for Germany" in Eastern Germany, in May 1990 Western Germany established the German unity fund of 115 billion Deutschmark (then around USD 80 billion). While today the sum seems to be inadequate, most economic experts that time expected that due to privatization revenue unification was largely self-financing.

On 18 May 1990, Helmut Kohl and the new Eastern German Prime Minister, Lother de Maziere, signed the state treaty to establish an economic, monetary and social union. In July, five new states (Saxony, Saxony - Anhalt, Mecklenburg - West Pomerania, Brandenburg and Thuringia) were established in Eastern Germany according to the Western German model of federalism. At the end of August, the unification treaty was signed, which meant an almost complete transfer of Western German institutions to Eastern Germany by the date of unification (3 October 1990).

Changes, badly needed

The Eastern German economy at the point of unification faced an overwhelming heap of problems: Immediately visible to every visitor, the whole state was gray, the industry in decline, the environment devastated. The centrally planned economy distorted incentives for workers and managers alike. Wages and prices did not reflect scarcities and the plans were "weak," ie distorted by incorrect information and production outside the plan.

The technological gap to the West was despite of import of Western technology widening in crucial fields such as microtechnology. Some necessary goods like foodstuff were heavily subsidized. Firms with deficits were also subsidized; bankruptcy was unknown. So every firm, however inefficient it worked, could survive in the GDR.

In this situation it was clear that economic institutions like laws, legal norms or organizations had to be changed. But in what direction? First, the leaders of the citizens' movement thought of something like a third way, new institutions like the short-living round tables, where citizens and state met to discuss changes. However, the Socialists resenting change and the unexperienced leaders of the citizens' movement made these meetings often ineffective. Soon, it became clear that the Eastern Germans in their great majority wanted an immediate introduction of Western institutions.

The following institutional transfer meant that Eastern Germans had to accept Western German laws, legal norms, organizations as a whole, with all their problems: Red tape, overregulation, the historically high standards of social and environmental regulation, without an immediate convergence of income. However, institutional transfer despite these problems can be seen as the most valuable asset in Eastern German transformation compared to transformation in Central and Eastern Europe. Eastern Germany immediately enjoyed certainty about the coming law. The disputes about law, the uncertainty about future investment, the weak enforcement of law—all this was largely absent.

Change of laws and norms

The problem of enforcement is especially important. While it is easy to transfer a law, the enforcement requires specific knowledge and skills. After 1990, thousands of civil servants, managers and academic teachers helped to implement the new institutions in Eastern Germany in a smooth way. While they were often resented as "Besser Wessi" (Mr Western I-Know-Everything-Better), their role should not be underestimated. Managerial and judicial skills for the new law, academic skills under the conditions of freedom of research instead of a Marxist-Leninist indoctrination were mostly lacking in Eastern Germany.

The social sciences departments of universities, the schools and the courts could all profit from the transfer of experience. Today, Eastern Germany offers, for example, a very well-renowned university landscape. Universities, such as Humboldt University in Berlin or the Jena University, attract scholars and students from all around the world with their long traditions and modern research facilities. Without institutional transfer, this would not have been possible.

Institutional change does not only mean change of laws and organizations but also change of social norms and values. This process is much more difficult, since those norms are often deeply rooted inside the human being. The change from the "Homo Sovieticus" to "Homo Oeconomicus" is a challenging task. Values that were long seen as detrimental, like entrepreneurship, suddenly became central in the new economy. The Socialist production process with frequent interruptions due to shortages and with labor hoarding inside firms led to a totally different working ethics. Marketing was not necessary under central planning.

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To change these "internal institutions" is not easy and will at least require a generation. Still today, Eastern German firms are weak in international markets. Their export orientation is much lower than in Western German firms. The lack of marketing skills is an important explanation for this. However, a new generation of entrepreneurs in high technology is also developing, especially in Saxony and Thuringia.

The Eastern German experience, in the context of Central and Eastern Europe, was unique and similar at the same time: It was unique, since Eastern Germany was the only country where a "big bang" really took place, where the change in institutions was carried out as speedy as possible. But Germany's experiences are also similar to those of other Eastern European countries, since the change of behavior, the change of perceptions and of long-lived attitudes is much more difficult to achieve than the change of laws and organizations in an economy.

Dr Bernhard Seliger, 15 January 2001

The author works at the Graduate School of International Area Studies of Hankuk University of Foreign Studies and does also research at the University of Witten/Herdecke, Germany.

Read part one of this series

[The next article in this series will discuss Germany's monetary unification and its aftermath.]

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