Real adjustment in the transformation process: Risk factors in East Germany

East Germany can be considered as a laboratory experiment in the economics of transition. Of the three major issues of economic reform in the transformation process (Siebert 1991c), two were solved nearly instantaneously. Monetary stabilization was achieved by extending the currency area of the DM to East Germany in the currency union of July 1, 1990. And the institutional infrastructure was introduced with one stroke when East Germany joined West Germany according to Article 23 of the German constitution. Thus, only the third major area of reform remained to be solved, namely real adjustment in the economy, especially in the previously state owned firms. The transformation of the East German economy thus can be viewed to be a specific exercise in real economic adjustment. In this paper I look at some of the risks that may arise from the transformation process in East Germany for German economic policy. Some factors which represented risks in 1990 no longer do because either a positive or a negative outcome has to be recorded (Section 1 ). The remaining risks relate to getting trapped on a low level of development in East Germany (Section 2 ) , to privatization getting stuck (Section 3 ), to an explicit structural policy (Section 4 ), to a persistence of the second labor market (Section 5 ) , and to transfers turning into a burden for Germany as a whole (Section 6 ). Some conclusions are drawn in Section 7.