Reasons for Gap between East and West Germany’s Levels of Economic Development over the Period of 1991-2016

In the year 1990 the German reunification took place, which became a major challenge for the two distinct economies. The former socialist republic with its planned economy has been integrated into social market economic system of FRG. 25 years after reunification the gap in the level of economic development has been closed by 70 percent, though persistent differences in the standard of living between the Old and the New federal states still take place. It is crucial to understand the factors of gap in the level of economic development between the two regions to determine an effective macroeconomic policy. The aim of this paper is firstly to identify the factors that explain the differences in the level of economic development between East and West Germany since Reunification and secondly to compare these factors in terms of convergence. With this aim in mind the evolution of the theory of convergence has been examined, existing literature on the topic of convergence in Germany has been reviewed, the empirical analysis of the factors has been conducted, the regression model has been built and its results interpreted from the macroeconomic point of view. The author comes to a conclusion that technological progress and human capital have been the most important factors of convergence between the two regions.