Revisiting German Unification from the Perspective of Social Costs

Abstract

This paper discusses the issue of German unification costs. After the Unification, German Federal Government facilitated the process of transition from socialist planned economy to social market economy and supported East Germans in their adaptation to the new system. The actions of the government included extensive public transfers from Western to Eastern Germany and these transfers continue until nowadays, thus their accumulated amount is regarded as enormous financial problem. These financial transfers from the German Federal Government are regarded as both one of characteristics and as one of the advantages of the East German transition when compared with other transition countries. Many researchers focused on this public transfer system itself and the breakdown of its expenditures. Previous studies have concluded that these transfer payments increased pressure on the German State Budget and did not always work very efficiently. In particular, expenditures related to social security in the East and other social policies have been criticized because these were often transferred for consumption rather than investment purposes. However, these expenditures supported the lives of Eastern Germans under the turbulent times. In this paper I focus on social costs which have been discussed in the field of transition economics. Social costs include but not limited to the following ones: decline of employment, increase of unemployment, impoverishment, increased inequality, depopulation, decline in fertility rates and so on. Although some of these problems have emerged even in Eastern Germany, they were not recognized as social costs. This paper examines social costs in Eastern Germany and identifies the factors which were accountable for their occurrence. In addition, it explains how these expenditures effectively reduce the escalation of social costs and resulted in many positive outcomes in both Eastern and Western Germany. Finally, I revisit the meaning of unification costs and the effectiveness of social policies.