When capitalism takes over socialism: the lasting economic divide between East and West Germany

Authors – Charlotte Bartels, Theresa Neef.

Abstract :

Thirty years after German unification, economic convergence between East and West German households has slowed down and differences in income and wealth persist. In this paper, we investigate economic differences between East and West German households along the national distribution of income and wealth. For this, we employ the Distributional National Accounts (DINA) method which aligns micro data with internationally standardized national accounts. We find that East German residents still earn and own a fraction of their West German counterparts with this gap expanding towards the top of the distribution. We then connect this finding to the design of privatization and investment policies in the early 1990s and show that the income gap is explained by both persistent lower capital ownership and less valuable capital held by East Germans. Further, we show that privatization did not only contribute to the cementation of income differences between East and West German residents, but also between the top 1% income earners and the bottom 99% of West German residents.