Poor Germany: Why the east will never catch up to the west by Chris Matthews @FortuneMagazine November 9, 2014, 8:16 AM EST E-mail Tweet Facebook Google Plus Linkedin Share icons On November 9, 1989, the East German government allowed its citizens to freely travel to West Berlin and West Germany, marking the beginning of the end of the Berlin Wall and the related policy that banned the movement of people from the communist East to the capitalist West. The anniversary offers a chance to look back on what German reunification has brought Europe’s most powerful economy and its people. One of the most salient facts about Germany today is how much hasn’t changed in terms of regional disparities in economic development. According to the German Federal Labor Office, unemployment in the former East German state sits at above 9%, while it hovers at 5.6% in the former West German territories, and the discrepancy would be worse were it not for government programs that bring jobs to the region. If you look at statistics such as per capita income or worker productivity, they also point to the large disparity in economic development between east and west. The Washington Post explained many of these discrepancies as the “legacy of communism,” writing: After the fall of the Berlin Wall, formerly communist eastern German companies and factories suddenly had to compete with their much more efficient western counterparts. Capitalism came too fast. Many eastern German companies went bankrupt and some regions never recovered from the shock. Until today, income levels are much lower in the east than in the west. Another recent story in Deutsche Welle, Germany’s international news service, examined the differences between the eastern and western economies, bemoaning the fact that, since reunification, West Germany has transferred more than $2 trillion in economic aid in an attempt to help the East catch up. The East has made some progress, somewhat catching up to the West in terms of per capita income. But deep divisions persist. The question is, are these differences really the result of the legacy of communism or failures in public policy? There’s no doubt that western-style capitalism proved to be a better system for creating wealth and raising living standards than Soviet-style communism. But the futility of communism has been overblown. It actually was quite successful at helping a war-torn Russia catch up with the west in the early days of the Soviet Union. If you compare, for instance, the development of Mexico and the Soviet Union from 1913 until the year the Berlin Wall fell, “the Soviet Union’s growth over the period of communism put Mexico’s to shame,” according to Charles Kenney, a senior fellow at the Center for Global Development. He points out that Soviet income per capita was 46% greater than Mexico’s in 1989, compared to just 1% larger in 1913. It’s impossible to know how East Germany would have developed absent the influence of communism (or how Western Europe would have generally recovered from World War II if the U.S. didn’t invest so much there in an effort to contain the spread of communism), but the idea that a history of communism taints an economy’s ability to modernize isn’t quite supported by the facts. The deep discrepancies in economic development between Germany’s different regions isn’t unique. According to the OECD, “Regional differences in gross domestic product (GDP) per capita within countries are often substantial and larger than among OECD countries.” In the United States, for instance, there are regional differences in economic development that match or exceed Germany’s, depending on which data you look at. To take one extreme example, Mississippi’s per capita income is just 54% of Connecticut’s. The former East German states have a per capita income that is 84% of the West German states, according to KfW, the German development bank. Of course, the discrepancy would be less severe if you, for instance, took the per capita income of the Northeastern United States and compared them with Southeastern or Midwestern states, but the point is that even the U.S. has regional economic differences that are comparable to Germany’s. Even economists don’t really have a full understanding of the economic development process, and no politician has hit on the secret formula for fomenting growth in their country or region. What economists do know is that when economic development takes hold in an area, people tend to flock to that area to take part in it. That’s obviously what’s going on in Germany, as the population of the east has shrunk from 16 million in 1989 to 12.5 million now, while the West German population has grown to 64.6 million from roughly 60 million. The problem, then, for Germany is not economic, but political. Because the unification of Germany happened so recently after so many years of division, some citizens bristle at the side effects of living in a nation with such diversity in economic output. Activists from the more economically vibrant areas protest the fact that their tax dollars are being used to subsidize government programs and living standards in the less fortunate parts. But this dynamic plays out in the U.S., without the regionalist undertones found in Germany. Take, for instance, South Carolina, which gets back in government spending $8 dollars for every $1 dollar its citizens pay in taxes, whereas many states like New York and California get back less than a $1 for every one they send to the federal government. As long as talented and motivated young people in Germany are allowed to freely leave the East for better opportunities in the West, regional differences in economic development will persist.