Transition of East Germany and the level of happiness

With the fall of the Berlin Wall in October 1990 there was the predictable euphoria amongst the population in eastern block countries and although you can change a political system overnight, an economic system takes many years. That is why economies in the transition phase usually use this period of happiness amongst the population to implement economic policies which will be very unpopular in the short-term but potentially have long-term benefits for the economy. However were East Germans happier after this freshly regained freedom in 1990?

Research has shown that is took over 25 years after transition for the level of happiness to be higher than in a June 1990 survey taken when East Germany was still a socialist state. Happiness declined sharply from 1990 to 1991 as unification occurred and recovered to about where it was before the transition to capitalism began. The decline in satisfaction was accompanied by a decline in output equating to about one-third of GDP with high levels of unemployment as numerous firms go bankrupt. Unemployment reduces happiness but also impacts those in employment as the threat of losing their job increases. In East Germany the unemployment rate was 14.8% in 1994 and it peak at 18.4 in 2004 – see graph below.

As well as unemployment the social safety net was a factor that influenced the level of happiness in East Germany. Satisfaction with health care, childcare and work were all surveyed from 1990 onwards, and all decline noticeably in the transition to capitalism. Under socialism jobs tended to be assured and employers provided sufficient childcare and financed comprehensive healthcare. With the shift to the capitalist systems a lot of these benefits disappeared. An East German respondent to a survey commented that:

The unification process is costuming me personally DM400 each month. I include in this higher rental and transport costs, as well as social costs. There are problems at all levels: traffic, crime, rent refugees, health care, social security. For me personally it is a vast and serious problem. People have lost old structures and certainties, and don’t know how to cope. I know that we here in the East have to go through a transition process, but it is difficult and for many no longer makes sense.

When asked about their level of happiness people focus on their immediate personal circumstances rather than the political environment. This includes having a job, making a living, caring for their family and ensuring good health. Only around 1 person in 25 members broad systemic issues such as the form of government or political and civil rights.

Many economists assumed that the transition of East Germany to capitalism would make everyone vastly happier. Pre-transition conditions in East Germany show that to increase people’s level of happiness, job security and a strong social welfare system were paramount. Happiness in most Eastern European countries has been on the increase but it is still likely to be short of where it had been prior to transition. However it is not just policies in socialist countries that increase the level of happiness, capitalist countries can achieve similar results.

Source: An Economist’s Lessons on Happiness. Farewell Dismal Science by Richard A. Easterlin (2021)

AS Economics Revision – Transition Economies

With the CIE AS essay paper on Monday next week here are some notes on the issues confronting transition economies – this topic is in Unit 1 of the syllabus. What have been the formidable challenges facing eastern European countries (command) embracing capitalism? Here are some thoughts as well as an informative video from the IMF:

  • In planned some goods are provided free but not in a market economy
  • Corruption – widespread in communist countries in eastern Europe – Oligarchs
  • Inflation ↑ – privatised firms began to charge prices that reflected high costs
  • Lack of entrepreneurial experience
  • Rising unemployment as owners of businesses try to make them more efficient.
  • Labour relations – Poor as workers are in a new environment – Job security?
  • Consumer sovereignty – some industries decline/expand
  • Resources – surplus and shortage
  • Self-Interest – fewer merit goods and more demerit goods
  • Time Gap before framework of government controls can be developed
  • Expansion of industry – potentially for greater externalities
  • Old/disabled – vulnerable with the change of government role
  • Welfare system – limited support for unemployed etc. will take time to develop
  • Provision of public services – disruption to police and other public services
  • Moral Hazard – the state insure workers against risks of losing their job