On-Line Appendix To: "Good Bye Lenin (Or Not?) : The Effect of Communism On People's Preferences"

On-line Appendix to:
Good bye Lenin (or not?): The eect of Communism on

peoples preferences
Alberto Alesina and Nicola Fuchs-Schndeln
February 8, 2007
Aggregate transfers
Gross transfers into East Germany amounted to around 101 billion Euro in 2002 (Lehmann et al.,
2005). Most of these transfers come as a part of the federal legislation already in place in Germany
before reunification, and are therefore not special transfers to East Germany, but transfers from
richer states or the federal government to poorer states. Subtracting federal tax revenues collected
in the East from the gross transfers, one arrives at net transfers of 67 billion Euro in 2002 (Lehmann
et al., 2005). Lehmann et al. (2005) do not report the transfers on the level of the states, but their
reported numbers of transfers into the East can serve as a reference point to validate our calculations.
We build a gross transfer measure that adds up three subcomponents of the transfers for any
state in West and East. The first subcomponent includes the payments from the German regional
transfer system (Lnderfinanzausgleich), also incorporating special payments by the federal government to poorer states (Bundesergnzungszuweisungen) and the special investment subsidies for the
East (Investitionsfrderungsgesetz Aufbau Ost). The calculation of this subcomponent is described
in further detail in subsection 1.1. The second transfer measure calculates the net transfers to any
state within the social security system (see subsection 1.2). The last transfer measure, described in
subsection 1.3, incorporates federal investment subsidy programs that are not specific to East Germany. To calculate net transfers, we subtract tax payments of every state to the federal government
from the gross transfer measure.
While our total transfer measure almost adds up to the one provided by Lehmann et al. (2005),
namely 98 billion Euros vs. 101 billion Euros, the numbers for the dierent subcomponents diverge
from the ones reported in Lehmann et al. (2005). However, we want to point out that, if the true
number per state is a linear transformation of our measure, then the results for the estimates of
interest would be unchanged. In a robustness check, we include the three subcomponents separately
as controls. It is even more likely that the true transfers per state are a linear transformation of
the calculated numbers within each subcategory (see also footnote 33). The three transfer subcomponents are highly positively correlated (with a correlation coecient between 0.68 and 0.8).
Moreover, the gross transfer measure is highly negatively correlated with tax payments to the federal
government, with a correlation coecient of -0.83.
1.1
German regional transfer system
Realizing the dierent economic powers of the states, the need for a financial equalization scheme
was written down in the West German constitution in 1949. In 1993, federal and state governments
reformed the system to administer massive monetary flows into the new eastern German states. The
new system (Solidarpakt I ) was established in 1995, and scheduled to expire at the end of 2004.
1
In response to the still significant economic needs of the eastern German states, the federal and
state governments negotiated an extension of the system (Solidarpakt II ) in 2001, which started to
become eective in 2005 and is scheduled to expire at the end of 2019.
The financial equalization scheme between the federal government and the states (Lnderfinanzausgleich) comprises a horizontal and a vertical component. In the horizontal component, the
financial needs and financial resources of any given state are determined via specific formulas. Based
on these calculations, it is decided whether a given state should receive extra financial resources,
or should share its resources with other states. The financial flows between the states in this step
sum up to zero. In the subsequent vertical component, certain states receive additional financial
resources from the federal government (Bundesergnzungszuweisungen). On top of that, since 1995
the eastern German states have received special support from the federal government based on the
Law for the Promotion of Investment in Eastern Germany (Investitionsfrderungsgesetz Aufbau
Ost).1 Last, the debt of the East German government was taken over by the western German states.
This led to annual interest and amortization payments by only the Western states (Fonds Deutsche
Einheit).2 Most of the information used to build this transfer measure comes from the Bundesministerium der Finanzen.3 This subcomponent of the transfers sums up to 15 billion Euro in 2002 for
the East, compared to 17 billion Euro reported in Lehmann et al. (2005).
There is one additional transfer measure that should be added to these numbers, which Lehmann
et al. (2005) report to sum up to 10 billion Euros. In a first step of the equalization scheme, the
receipts from value added taxes are divided between the states. 75 percent of the receipts are
divided based on the number of inhabitants, while 25 percent of the receipts are divided according
to a formula that takes the financial needs of the states into account. Hence, this procedure leads
to implicit flows between states. Unfortunately, we were not able to obtain the amounts of these
implicit transfers on the level of the states. However, it is likely that adding these amounts would
result in a linear transformation of our measure, since the applied formulas are very similar.
1.2
Net transfers through the social security system
The fairly generous West German social security system was adopted in the East right after reunification. Thus, the social security system is a uniform German-wide system. The system provides
indirect West-East transfers, since the gap between contributions and payments is larger in the East
than in the West. We calculate these indirect transfers by subtracting social security contributions
made by the inhabitants of any state from the social security payments received by inhabitants of
that state. The source of these numbers are the national accounts of the states (Volkswirtschaftliche
Gesamtrechnung der Lnder ). This component adds up to 76 billion Euros for the Eastern states in
2002, compared to 55 billion Euros reported in Lehmann et al. (2005). We have no good explanation
for this discrepancy.
1.3
Transfers through investment subsidy programs
Last, there exist several investment subsidy programs, financed and organized through the European
Recovery Program, the state-owned bank Kreditanstalt fr Wiederaufbau, or directly through the
federal government as part of the federal governments special infrastructure programs (Gemeinschaftsaufgabe Verbesserung der regionalen Wirtschaftsstruktur ).4 These programs apply to eastern
1 Since 2002, these flows have become part of the Bundesergnzungszuweisungen, and hence they have only been
added in 1997.
2 Note that the regression results are unchanged when we omit the Fonds Deutsche Einheit in calculating the
transfers.
3 Bundesministerium der Finanzen: Bund-Lnder Finanzbeziehungen auf der Grundlage der geltenden Finanzverfassungsordnung, Ausgabe 2005.
4 Specifically, we capture subsidies through the following programs: Stdtebaufrderung, ERP Regionalprogramm,
ERP Existenzgrndungsprogramm, ERP Eigenkapitalhilfeprogramm, ERP Innovationsprogramm, ERP Umweltpro-
as well as western states. We have information on the average subsidies per state for the period
1999 to 2003 (Bundesamt fr Bauwesen und Raumordnung, INKAR 2005), and calculate an annual
subsidy by dividing these figures through 5. Thus, there is no time-series variation in our information concerning these subsidies. This component adds up to 7 billion Euros for the Eastern states,
compared to 18 billion Euros reported in Lehmann et al. (2005). The list of programs captured in
Lehmann et al. (2005) is longer than the list of programs for which we could find data on the state
level.
gramm, GRW gewerbliche Wirtschaft, GRW Fremdenverkehr, GRW Infrastruktur, KfW Infrastrukturprogramm,
KfW Innovationsprogramm, KfW Mittelstandsprogramm, Gemeinschaftsaufgabe Hochschulbau, KuM-Frderung.

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On-line Appendix to:

Good bye Lenin (or not?): The eect of Communism on

German regional transfer system

Net transfers through the social security system

Transfers through investment subsidy programs

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