The Iron Curtain and Entrepreneurship

Some things appear so self-evident that it should be a breeze to produce scientific proof of their correctness. Take the notion that centrally planned economies – aka communist systems – are not good at fostering an entrepreneurial spirit. Alas, providing conclusive proof has proved actually quite elusive. Until now, that is.

A new CESifo study makes use of that most bountiful natural experiment in comparative economic systems ever, German reunification, to pin down a proof. As pointed out elsewhere, partitioning a fairly homogeneous, equally destitute population and subjecting it for 40 years to full-fledged versions of opposite economic and political systems provided an unequalled opportunity for all kinds of economists, sociologists and political scientists to conduct comparative studies — and to see what happens when one such system unexpectedly ceases to be.

The authors of the study – Oliver Falck, Robert Gold and Stephan Heblich – investigated how school-age education affects occupational choices by focusing on how German reunification affected the formation of entrepreneurial intentions. Reunification came as a shock: it was unexpected and swift, and completely swept away East Germany’s institutional and economic framework, replacing it with West Germany’s. State-owned enterprises were privatised, political competition introduced, freedom of speech guaranteed. The East German economy became fully integrated into the free-market economy of reunified Germany.

With reunification, socialist ideology was immediately dropped from school curricula and the ideological indoctrination imparted through children and youth organisations came to an end. Such a shift can be considered an extreme case of a policy intervention, a godsend to assess how policy can affect entrepreneurial intentions.

Swift and thorough the 'policy intervention' may have been, but some things – attitudes, mostly – linger on. One of the many marked differences between both economic systems related to their respective perceptions of entrepreneurship. While the free-market west considered it an important driver for economic growth, the communist east propagated the notion, at school and through the media, that entrepreneurs are expropriators who must be overthrown by the working class.

Comparing students who studied at the same university, chose the same major, and lived the same number of years in reunified Germany, the authors find that university students who were born in the former East Germany report significantly lower entrepreneurial intentions than those who grew up in West Germany, irrespective of whether the East German students received some education in the free-market economy or not. Those East German students who finished school after reunification, and therefore experienced some free-market education, show higher entrepreneurial intentions than those who finished school before reunification. The latter are 9.7 percentage points less likely to express entrepreneurial intentions than their West German counterparts, while those who received at least some free-market education by finishing school after reunification are on average only 2.8 percentage points less likely to express such intentions. Put differently, the lack of a free-market education accounts for nearly three-fourths of the difference in entrepreneurial intentions.

To make doubly sure that their findings were bullet-proof, the authors subjected them to a wide range of robustness checks, such as leaving out occupations that typically lead to self-employment. None altered the significance of their results.

Clearly, thus, a sudden change in the institutional environment of school-age children can indeed affect the formation of entrepreneurial intentions, indicating that such intentions are formed during school-age and may be hard to change later in life.

This all suggests that changes in schooling, curricula, extra-curricular activities and, perhaps, even media campaigns could be effective policy measures to stimulate entrepreneurial intentions.

Hopefully, policymakers will have the wits to turn this into another self-evident truth.

Oliver Falck, Robert Gold and Stephan Heblich: Lifting the Iron Curtain: School-age Education and Entrepreneurial Intentions, CESifo Working Paper No. 5532

Other CESifo Working Papers by Oliver Falck
Other CESifo Working Papers by Stephan Heblich
Other CESifo Working Papers dealing with reunification
Other CESifo Working Papers dealing with entrepreneurship