Warwick Economics Research Papers ISSN 2059-4283 (Online)
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The Separation and Reunification of Germany: Rethinking a Natural Experiment Interpretation of the Enduring Effects of Communism Sascha O. Becker, Lukas Mergele, and Ludger Woessmann This paper also appears as CAGE Discussion Paper No: 461 March 2020 No: 1255 Published in the Journal of Economic Perspectives Warwick Economics Research Papers ISSN 2059-4283 (online) ISSN 0083-7350 (print) The Separation and Reunification of Germany: Rethinking a Natural * Experiment Interpretation of the Enduring Effects of Communism Sascha O. Becker, Lukas Mergele, and Ludger Woessmann† Abstract German separation in 1949 into a communist East and a capitalist West and their reunification in 1990 are commonly described as a natural experiment to study the enduring effects of communism. We show in three steps that the populations in East and West Germany were far from being randomly selected treatment and control groups. First, the later border is already visible in many socio-economic characteristics in pre-World War II data. Second, World War II and the subsequent occupying forces affected East and West differently. Third, a selective fifth of the population fled from East to West Germany before the building of the Wall in 1961. In light of our findings, we propose a more cautious interpretation of the extensive literature on the enduring effects of communist systems on economic outcomes, political preferences, cultural traits, and gender roles. Keywords: political systems, communism, preferences, culture, Germany JEL classification: D72, H11, P26, P36, N44 February 22, 2020 * Our particular gratitude goes to Oliver Falck, with whom we started this project long ago and who provided continued support throughout. We also thank the four editors—Enrico Moretti, Gordon Hanson, Heidi Williams, and Timothy Taylor—for extensive comments. Discussion and comments from Davide Cantoni, Fredrik Carlsen, Nicola Fuchs-Schündeln, Oded Galor, Ulrich Glogowsky, Peter Gourevitch, Moshe Hazan, Sebastian Klüsener, Kjell Erik Lommerud, Rocco Macchiavello, Omer Moav, Markus Pannenberg, Jared Rubin, André Steiner, Joachim Voth, Romain Wacziarg, Felix Weinhardt, Niko Wolf, Chris Woodruff, Michael Wyrwich, and seminar participants in Trondheim, Bergen, Warwick, and San Diego in 2012, the Warwick Summer Workshop in Economic Growth 2014, and the Workshop on Institutions, Culture, and Long-Run Development 2015 at the Center for Advanced Studies in Munich are gratefully acknowledged. We would like to thank Ulrich Blum, Lucian Hölscher, Sebastian Klüsener, Thomas Rahlf, and Michael Wyrwich for providing data. Christoph Albert and Laurenz Detsch provided capable research assistance. Support by the competitive procedure of the Leibniz Association, the German Science Foundation (CRC TRR 190), and the Fritz Thyssen Foundation is gratefully acknowledged. † Becker: Monash University, University of Warwick; CEPR, CESifo, IZA, CAGE, and ROA; [email protected]. Mergele: ifo Institute at the University of Munich; CESifo; [email protected]. Woessmann: University of Munich and ifo Institute; CESifo, IZA, CAGE, and ROA; [email protected]. German separation in 1949 into the German Democratic Republic and the Federal Republic of Germany and its reunification in 1990 seem to offer a unique setting of a rather unexpected introduction and termination of a communist regime in one part of a previously and afterward unified country. Analyzing East-West differences in Germany provides the opportunity to study effects of living in different political systems, which has general relevance for our understanding of the fundamentals of economic preferences and behavior. This paper shows that because of pre-existing differences and early selective migration, German division and reunification do not provide a straightforward case of a natural experiment. Taking these challenges into account, it summarizes what can be learned from the literature that studies how individuals who lived in East and West Germany differed at reunification and how these differences have evolved since then. Under the communist regime, economic and general well-being of the East German population fell far behind the development in the West, as shown in Figure 1. While it is impossible to estimate a precise causal effect of communism on economic prosperity and personal freedom, it is clear that by the end of the 1980s, people in the West were immensely better off in terms of GDP per capita and life expectancy.1 Maybe more surprisingly, while life expectancy in the East has converged quickly to the Western level after reunification, the convergence of economic activity has stalled after an initial surge—despite continuing major transfers from West to East. Many scholars of transition economics had expected that changing the system would suffice to ensure convergence, as undoing the artificial distortions that central planning imposed on the economy would let it return to its natural market orientation. Initial decisions about converting East German marks at 1:1 parity, how to carry out privatization, and other policy choices may have contributed to the path of East German economic activity after reunification. But a growing literature emphasizes that living under communism may have changed people’s attitudes and preferences more deeply, giving rise to much more enduring effects even after the end of the political regime—and suggesting that transitions are about more than removing policy distortions. Still, even though East Germans were unlikely to anticipate that their choices under communism might be suboptimal under an alternative regime, learning about the effects of communism based on the experience of German division and reunification poses unique challenges. To be considered a natural experiment, the exposure to different political systems 1 GDP estimates for the communist East should be interpreted with care because the lack of market prices makes well-founded GDP calculation impossible and because of potential misreporting. 1 would have to be unrelated to any other characteristics of the population that may be related to the outcomes of interest. In the first sections of this paper, we highlight several sources of endogeneity that would violate the interpretation of the differential exposure to political systems as natural experiments. First, the drawing of the border between East and West Germany was not random. We demonstrate that substantial differences in economic structures, political preferences, cultural traits, and gender roles between what later became East and West Germany existed well before World War II. Second, East and West Germany were differentially affected by the war and by the dismantling of infrastructure and reparations to the occupying forces in the immediate after- war period. Third, roughly one-fifth of the East German population moved to West Germany between 1945 and the building of the Berlin Wall in 1961, and this out-migration was likely selective with respect to political and economic preferences. Prior literature considers some of these aspects but tends to miss important pre-existing differences by using rough measures or by aggregating data that combine the area of what would later become the German Democratic Republic with areas that would be part of Poland. For this paper, we collect fine-grained data on a broad series of indicators at the county level that allow us to provide a clearer picture of pre-existing differences. Together, this evidence suggests that we might expect substantial differences in attitudes between individuals who lived in East and in West Germany even in the absence of differential exposure to political systems. We then turn to an overview of the available evidence about Germany’s experience of separation and reunification on enduring differences in economic outcomes, political attitudes, cultural traits, and gender roles. We do not attempt a formal reworking of any of this literature, but instead focus on whether the central results of various studies are likely to have an upward or downward bias when aspects of pre-existing historical differences, differential treatment during World War II and the occupation period, and German-German migration before the Berlin Wall are taken into account. Our discussion also suggests a broader lesson beyond the effects of German reunification. There is a wide literature exploring how political systems persistently affect the economy and population preferences, with a particular focus on different legacies between capitalist and socialist societies (for a review, see Simpser et al. 2018). Studies examining a major political event, like the arrival or departure of communism or other forms of autocracy, might face similar challenges when interpreting the before-and-after differences as a natural experiment. The ways in which borders were originally drawn, events that took place during the transition, and patterns of in- or out-migration are often important. Thus, we are proposing 2 the need for a reinterpretation of the existing literature on the “effects” of communism and call for a closer consideration of the formation of political systems more generally. Pre-existing Differences between East and West Germany Historical Background: How the Border Got Drawn The location of the border between the German Democratic Republic (GDR) and the Federal Republic of Germany (FRG) is not the random outcome of where American, British, and Soviet tanks stopped at the end of World War II in 1945. Instead, in anticipation of the defeat