The Berlin Wall and the Russo-Ukrainian Crisis

By Dr. Alan Greenspan, Senior Economic Advisor

The current Russo-Ukrainian crisis the world is witnessing is the worst conflict between Moscow and the West since Russia’s 2014 annexation of Crimea, if not since the Cold War. Russia is demanding the West scale back its military presence in former Soviet states and agree that Ukraine and other states will not be allowed to join NATO. The U.S. and its allies refuse to allow Russia to impose its will on sovereign states. U.S. Deputy Secretary of State Wendy Sherman said “We will not allow anyone to slam closed NATO’s open door policy, which has always been central to the NATO alliance.”

While U.S. Secretary of State Antony Blinken has urged Russia to take a diplomatic path forward, it seems in the past week that hopes of resolving this conflict diplomatically are fading. Last week, Russian diplomats were evacuated out of Kyiv and just this week, the U.S. State Department has ordered the families of American diplomats at the embassy in Kyiv to leave the country as well. Russia has amassed more than 12% of its activeduty military along the Ukrainian border as Baltic neighbors send anti-tank and anti-aircraft armament into Ukraine. According to a U.S. State Department official, “The security conditions, particularly along Ukraine’s borders, in Russia-occupied Crimea, and in Russia-controlled eastern Ukraine, are unpredictable and can deteriorate with little notice. Demonstrations, which have turned violent at times, regularly occur throughout Ukraine, including in Kyiv.”

The current conflict bears strong resemblance to the Berlin Crisis of 1961, the last major politico-military incident of the Cold War, during which the USSR demanded all armed forces withdraw from Berlin, culminating in the erection of the Berlin Wall. Russian President Vladimir Putin’s goal has been to restore Russian glory following the humiliating breakup and subsequent demise of the Soviet Union 30 years ago precipitated by the fall of the Berlin Wall. In effect, Russia seeks to reestablish the buffer zones of the Soviet states or at the very least preserve what buffer remains. This leads me to suspect that Russia’s actions are not driven, as it claims, by a fear for its own national security in the form of direct conflict with NATO but rather a desire to project its own ideologies onto its neighbors. The fall of the Berlin Wall sheds light on why a tilt toward the West by Ukraine is so worrisome to Russia.

When the Berlin Wall fell in 1989, though the event itself was remarkable, what was even more amazing in the following days was the economic ruin the fall of the wall exposed. One of the most fateful debates of the twentieth century had been the question of how much government control is best for the common good. After World War II, the European democracies all moved toward socialism, and the balance was tilted toward central government control even in America—the entire war effort by American industry had been effectively centrally planned.

That was the economic backdrop of the Cold War. In essence, it turned out to be a contest not just between political ideologies but between two great theories of economic organization: free-market economies versus centrally planned ones. And for the past forty years, they’d seemed almost evenly matched. There was a general belief that even though the Soviet Union and its allies were economic laggard, they were catching up with the wasteful market economies of the West.

Controlled experiments are rare in economics. But you could not have created a better one than East and West Germany, even if you’d done it in a lab. Both countries started with the same culture, the same language, the same history, and the same value systems. Then for forty years they competed on opposite sides of a line, with very little commerce between them. The major difference subject to test was their political and economic systems: market capitalism versus central planning.

Many thought it was a close race. West Germany, of course, was the scene of the postwar economic miracle, rising from war’s ashes to become Europe’s most prosperous democracy. East Germany, meanwhile, became the powerhouse of the Eastern bloc; it was not only the Soviet Union’s biggest trading partner but also a country whose standard of living was seen to be only marginally short of West Germany’s.

The fall of the wall exposed a degree of economic decay so devastating that it astonished even the skeptics. The East German workforce, it turned out, had little more than one-third the productivity of its western counterpart, nothing like prior estimates of 75 percent to 85 percent of West German productivity. The same applied to the population’s standard of living. East German factories produced such shoddy goods, and East German services were so carelessly managed, that modernizing after the fall of the Berlin Wall was going to cost hundreds of billions of dollars. At least 40 percent of East German businesses were judged so hopelessly obsolete that they would have to close; most of the rest would need years of propping up to be able to compete. Millions of people were losing their jobs. Those people would need retraining and new work, or else they were likely to join the throngs migrating west. The extent of the devastation behind the iron curtain had been a very well-kept secret, but now the secret was out.

What Russia truly fears is that its neighbors will adopt the liberal democratic political systems and economic principles of the West. If they do so and become more prosperous than their one-time rulers in the process, then the ability of the Russian ruling class to control its own citizens will be greatly compromised. I believe the fall of the Berlin Wall and the disparity in prosperity conferred by capitalism over socialism that it revealed to the world explains much of Putin and Russia’s apprehension in allowing Western ideologies to take hold so close to its border.