Abstract
The article analyzes how the particular combination of historical circumstances, government policies, and institutional structures have shaped the quest for competitiveness of the East German manufacturing sector after unification in 1990. The nature of unification precluded the option of achieving short-run competitiveness via declining real wages leaving rapid productivity growth as the only possible avenue to pursue. The East German experience underlines the importance of crowding-in, particularly in the context of adverse initial conditions. It suggests that large-scale investment does not necessarily bring with it a commensurate build-up of research and development with positive spill-over effects for growth. It also cautions against the blind adoption of institutional arrangements from a different political-economical context, especially regarding capital-labor relations.
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