The roots of economic failure: what explains East Germany's falling behind between 1945 and 1950?

The relative decline of the East German economy after 1945 has eluded researchers, as several large shocks appeared to have hit it at the same time. In this paper, we revisit the immediate post-war period in both parts of Germany to obtain a more comprehensive picture of the output and productivity shocks operating in both economies. Our principal finding is that the dismantling of the capital stock alone cannot explain the inferior performance of the East German economy. The collapse of output after the war and the ensuing recovery in both parts of the country were driven by total factor productivity; changes in factor endowments were of second-order significance. West Germany began to lead East Germany in industrial labor productivity well before the economic reforms of 1948 could make their mark. The major factor contributing to this early divergence were disproportions in industrial structure caused by the division of Germany.