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

The relative economic decline of East Germany after 1945 has been difficult to explain given the confluence of several powerful shocks. This paper revisits the early post-war years in both parts of Germany to assess the output and productivity shocks that operated in both economies. Our main finding is that the dismantling of the capital stock alone cannot explain the falling behind of East German industry. Both the collapse of output and the recovery that followed in both part of the country were driven by total factor productivity; changes in factor endowments were of second-order significance. Disproportions in indutrial structure caused by the division of Germany were instrumental behind the productivity divergence between the two nascent German states.