Documento de Trabajo

The German unī cation process imposed a signī cant price-cost squeeze on eastern ̄rms. Important technology di®erences between the East and the West generated high pressures on the competitive position of eastern manufacturing ̄rms when product and factor markets integration took place. In order to avoid mayor employment and output costs, the government subsidized eastern ̄rms. A similar process is expected in China after accession into the WTO. The restrictions to foreign ̄rms to access domestic markets have to be lifted, and hence significant cost pressures on native, specially state-owned enterprises, are expected. The projected employment shift from native to foreign ̄rms suggests that the Chinese government may decide to slow down the transition process, as Germany did. This paper estimates the ̄scal costs of artī cially targeting state employment through product price subsidies rather than allowing factor reallocation. The subsidy needed to increase East Germany's manufacturing employment by 1% was around 0.9% of value-added prices, compared to a 1.2% subsidy if China targets state employment or 18.7% if China targets native employment. These numbers imply that the annual cost per worker targeted in Germany more than 13 times the cost per worker in China. (JEL: F15, F16, H2.