Transition with Insurance: German Unification Reconsidered
Transformation of the economic system involves the risk of a transitory fall in living standards. In German unification, West Germany promised to carry that risk for East Germany ("Paretian promise"), but also insisted on being paid an "insurance fee." That frequently neglected fee comprises nothing less than the bulk of East Germany's endowment, i.e. the state-owned capital and land. One share of the fee was arranged to go to the, mostly West German, previous owners, another to the public sector. The circumstances of privatizing the public sector's cut result in a third share going to the, again mostly West German, buyers and also help to explain the puzzle of wages and unemployment rising simultaneously. Some policy proposals that are now discussed amount to shifting the risk and/or the fee back to the East Germans. Although well motivated, this would violate the original terms of the unification deal. Copyright 1992 by Oxford University Press.
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