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Abstract
The regional imbalances that characterize many advanced industrial economies have long frustrated economic policymakers. The large gaps in our understanding of these imbalances prompt the question: Will the evolution of the east German economy over the next decade reveal a new economic miracle—Wirtschaftswunder—or the emergence of another regional problem within the European Community? On the one hand, the saving surplus in west Germany provides a large pool of resources from which the investment needs of east Germany can be financed. Moreover, the tradition of enterprise in the eastern part of the country was strong before World War II and it may be possible to revive this tradition quickly, despite its long suppression by the system of central planning. On the other hand, given the present dearth of capital in east Germany, it will be some time before west German wage levels can be supported in the east without large-scale subsidies or substantial unemployment. This creates obvious tensions. While a slow closing of the earnings gap might result in a migration of the most skilled to the west, a premature narrowing of the gap could well discourage investment; either might endanger the process of economic recovery in the east.
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