Reconciling the Neoclassical Model of Economic Convergence with the Complexities of German Reunification

Abstract

Considering post reunification productivity differences between East and West Germany, this paper seeks to evaluate the explanatory power of the neoclassical model of convergence. This is achieved by considering two materialised deviations from the theoretical model: accelerated convergence in the 1990s and subsequent stagnation of convergence. The paper explores the exogenous factors including federal policies, the Treuhandanstalt, supply chain structures and competition intensity which may account for these differences to reach a final evaluation of the accuracy of the neoclassical model. This paper ultimately concludes that the explanations of the neoclassical model can be convincingly defended for the 1990s but that the model, even when accounting for exogenous influences, holds little explanatory power regarding the subsequent Eastern productivity stagnation.