Growth Effects of EU Membership: The Case of East Germany

Gundlach, E. (2001). Growth Effects of EU Membership: The Case of East Germany. IIASA Interim Report. IIASA, Laxenburg, Austria: IR-01-035

Preview

Text IR-01-035.pdf Download (176kB) | Preview

Abstract

The East German experience with EU membership (after unification in 1990) probably comes close to what might be called a controlled experiment for assessing the growth effects of EU membership. East Germany could rely on the tried and tested rules and institutions of the West German social market economy and had immediate access to large amounts of financial resources in the form of public transfers. Notwithstanding these rather unique favorable starting conditions, high-flying expectations have been disappointed so far.

This paper uses an open-economy neoclassical growth model as a measure of reference against which the actual performance of the East German economy can be evaluated. Ignoring the very first years after unification, the theoretically predicted growth rate for the period 1993-2000 exceeds the observed growth rate by an order of magnitude. With no obvious differences in institutions and technology, and with physical capital accumulation in East Germany exceeding the West German rate, differences in human capital remain as the major reason for differences between the theoretical and the actual East German growth rate. Simulation results suggest that East Germanys stock of human capital per worker reaches only about one third of the West Germany level.

The possibility that human capital rather than physical capital seems to be the decisive bottleneck for growth and convergence should dampen overly optimistic growth expectations of EU membership in the present group of accession countries. Since the economically relevant stock of human capital cannot be increased as easily as the stock of physical capital, the main lesson from the East German experience for other EU accession countries is that catching up may come to a halt below the EU average, even under pretty favorable institutional and financial conditions.

Actions (login required)

View Item