Was the fall of the Berlin Wall as economically significant as some suggest?

Transcript

November 2014 marks 25 years since the fall of the Berlin Wall. But was the world-changing event the ultimate triumph of capitalism and liberal democracy that commentators would have us believe? World Finance speaks to economist Liam Halligan to discuss.

World Finance: Well Liam, setting the politics to one side, what were the economic milestones immediately leading up to the fall of the wall?
Liam Halligan: A collapse in the oil price in the mid-80s; the Soviet edifice, the evil empire, came under huge economic pressure; the big inconsistencies and incoherence of central planning was laid bare. And like many empires before it, the Soviet Union collapsed.

People say the fall of the Berlin Wall was difficult to forecast; it wasn’t really. By mid-1989 of course, the wall had been breached in Hungary; you had Gorbachov making serious attempts to ingratiate himself with the West, and so on. You had financial aid going to the Soviet Union from the western world by then.

And then of course the wall came down, to be followed very soon afterwards by German reunification, with all the expense that that imposed on folk in West Germany as Germany was once again reunited.

World Finance: Well how subtle would you say the economic and business divide between west Germany and the east is today? What figures are we looking at?
Liam Halligan: We’ve seen enormous investment by former West Germany in east Germany. The early days of reunification were very difficult for both sides. Not just because West German consumers had to endure heavy taxes to pay for reunification, but also because folk in the east of course, their Eastern Marks became worthless.

So throughout the early and mid-90s, Germany, believe it or not, was the sick man of Europe! It was a very, very big adjustment. That’s one reason why German voters now are so impatient when they look at the struggling countries on the fringe of the eurozone, the so-called ‘Club-Med countries’. They think, ‘If we can adjust to what we had to endure, then you can adjust as well.’

People say the fall of the Berlin Wall was difficult to forecast; it wasn’t really

The German economy in general has used reunification. East Germany has acted like a bridgehead to the former Soviet Union. And that’s one reason why Germany has so successfully exploited the collapse of communism. You now have enormous German inward investment and trade links – not just with Poland, but also with Russia itself. And that’s a big reason why it strikes me that Germany’s been able to continue its very strong export performance, and why in the end, as a result of reunification and the shift east complementing its big trade links with the rest of Europe, the German economy is now among the most future-proofed – if you like – of any of the big economies of the world.

World Finance: Well economically speaking, over the last 25 years, how much did west Germany have to foot the bill for the east?
Liam Halligan: Something like eight to 10 percent of west German GDP. But of course, the whole trajectory of growth since then, since that difficult adjustment of the early- and mid-90s has been much greater.

World Finance: So comparatively speaking, how have other former Soviet states faired?
Liam Halligan: Kazakh GDP back in 1999 was about one fifth of US levels. It’s now two fifths of US levels.

Polish GDP back in 1999 was about a quarter of US levels per head. It’s now almost a third.
The numbers are similar for Russia. So you have seen very, very considerable catch-up of these post-communist economies.

While the talk on everybody’s lips then was, ‘Oh, this is the end of history, this is going to be the triumph of western democracy and liberal economics,’ it hasn’t actually turned out like that. Because many of these post-communist countries have taken their own path. Some involving democracy to various degrees; some not. Some involving very stripped-down, liberalised, almost Hayekian economies; some involving much more state intervention.

And many of them have enjoyed relative economic success. You know, there is a sense of doom and gloom and missed opportunities pervading the mainstream western view of many of these countries post-communism. But that really isn’t right, because hundreds of millions of people now have far, far, far more economic freedom now than they ever had.

World Finance: Well you might say that the Thatcher-Reagan economic coalition was a direct and primary construct in dismantling the wall. How far would you agree with this over the argument that it was the primary fault of Soviet leaders misunderstanding basic economic policy?
Liam Halligan: Those two leaders, whatever you may think of them, remain revered across a range of opinion in the post-communist world to this day.

But I think what really caused the Soviet economies to collapse is that central planning just doesn’t work. It goes completely against human nature, it has to rely on oppression, thought control, the dead hand of a gargantuan state. And if like me you’ve lived in these parts of the world quite a lot, and had many conversations with people who worked, and tried to eke out a livelihood under those circumstances. It’s totally clear that in the end it would just collapse, because it doesn’t produce anything really of meaningful economic value.

I think what really caused the Soviet economies to collapse is that central planning just doesn’t work

Many of the countries we characterise as state-dominated actually have far, far healthier fiscal balance sheets than we do here in the west; far, far lower government debts, much more reserves; and also lower tax rates. And it’s clear to me that you don’t see much evidence of it in the western media, but there is an enormous amount of business going on in eastern Europe, in Russia, across the post-communist world. And we should spend a lot more time engaging with these countries.

World Finance: Now Helmut Kohl was the German Chancellor at the time of the fall of the Berlin Wall, and in subsequent years built up modern-day Germany. So, how successful do you think he was, and his successors have been?
Liam Halligan: Germany is one of the few large economies in the world that has considerable strength going forward. Of course it has superb export performance, a very high degree of education and vocational training, which is the envy of the rest of the western world.

World Finance: So despite it being 25 years on, and the economy is said to be weakening, you don’t think Germany has had its day?
Liam Halligan: In another 25 years after the fall of the Berlin Wall, it’s almost certain that Germany will be trading a lot more with the countries that aren’t currently in the EU, than the countries that are currently in the EU.

Germany’s whole commercial centre of gravity is shifting east, towards China, towards Russia, and that’s one of the, sort of, big unspoken truths of European politics at the moment.

Of course Germany has to act like a good European, has to act as if the thing it cares about most is the EU – that’s certainly what the politicians say, and maybe even some of them believe it. But as far as Germany’s industrialists are concerned, they’re increasingly looking east. And as the memory of the fall of the Berlin Wall slips ever further into the past, that trend will continue.