East Germany - Still a Long Way to Convergence?

Only investments in education will lead to a further catch-up

 

The East German economic convergence process has dramatically slowed down. The economic performance of East Germany stagnates between 70 and 80% of West Germany's level, depending on the statistical figure used. Politicians' and economists' explanations for this development differ: While politicians often want to achieve further progress via subsidising enterprises or further investing in infrastructure, scientists stress that investment in human capital is the most important source of future growth.

In the first half of the 1990's, policy focused on the built-up of physical infrastructure. East Germany's economic performance increased substantially. "This process benefited from transfers from West Germany, which is why productivity advanced faster compared to other transition countries such as Poland, Hungary or the Czech Republic," says Oliver Holtemöller, IWH Vice president.

Today, the East-German physical infrastructure is on the same level like in West Germany. The causes for the long-lasting economic gap between East and West Germany lie elsewhere.

Demography

While the population in West Germany had been stagnating since the turn of the millenium and recently even increased, East Germany suffers a decline in population of about 15% since 2000 - even though many people had left East Germany already after the German unification. "On the one hand the decline can be explained by natural demographic development. On the other hand, people still have better economic perspectives in the West and hence move", Oliver Holtemöller points up. Indeed, in 2015 population increased in East Germany, too. But this is mainly due to the extraordinary influx of refugees who are distributed to the federal states of Germany according to a fixed key.

 

Investment in Education and Research is Insufficient

To improve the economic situation, it is essential to invest in education and research, namely from early childhood development to academic training. Education does not only enable people to participate in the labour market with equal chances but also fights poverty in old age more effectively than a nationwide statutory minimum wage.
Education is the key for innovations and productivity. Ivestments in research and development are equally important. In 2012 for example, Saxony-Anhalt (one of the Eastern federal states and part of the Central German Metropolitan Region) spent just 1,5% in relation to the GDP for research and development which was the lowest number among all German federal states.

Missing Internationality

The German economy is strongly oriented toward international markets. International economic exchange creates a large part of national wealth. Saxony-Anhalt however has an export turnover of only 30% which is a rate well below the German average of 45%.

"In some places, xenophobia openly emerges. This is definitely a negative location factor."

"Partly obvious xenophobia aggravates the situation", says Holtemöller. This is a negative location factor for the East German regions: In Saxony-Anhalt for example, the number of right-wing extremist crimes is twelve times higher than in Hesse, a West German federal state. This complicates the recruiting process of skilled employees from foreign countries.

"A one-sided orientation toward physical capital and technology will not help on. The key future drivers are human capital, creativity and cosmopolitanism," Holtemöller summarises.

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