East Germany Rearguard
Only investments in education will lead to a further catch-up
Dossier
In a nutshell
The East German economic convergence process is hardly progressing. The economic performance of East Germany stagnates between 70 and 80% of West Germany's level, depending on the statistical figure used. The productivity gap between East German companies and equivalent groups in the west remains even if firms of the same size of workforce and the same industry are compared.
Politicians' and economists' explanations for this development differ: While politicians are more likely to argue with the start-up difficulties, the lack of large-scale research firms and the break-up of the East German markets, scientists have brought lack of investment in education and research, the lack of internationality and insufficient innovations – and thus future-oriented arguments – to the forefront.
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In the first half of the 1990's, policy focused on the build-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 as West Germany. However, the fact that the catch-up process has remained slow thus far, also in terms of the employment structure in East Germany, has other causes.
Demography
While the population in West Germany had been stagnating since the turn of the millennium and recently even increased, East Germany suffers a decline in population of about 15% since 2000 since many people left East Germany 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 elsewhere and therefore move,” Oliver Holtemöller points out. Indeed, in 2015, the population increased in East Germany as well. But this is mainly due to the extraordinary influx of refugees who are distributed to the federal states of Germany according to a fixed ratio.
Insufficient investment in education and research
To improve the economic situation, it is essential to invest in education and research – 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 and unemployment, which is far more sustainable, for example, than the widespread minimum wage. Education is the key to innovation and productivity. The same is true for investments in research and development. In 2012, for example, Saxony-Anhalt spent just 1.5% in relation to GDP, which was the lowest number among all 16 German federal states.
Lack of internationality
The German economy is strongly oriented toward international markets. Here Saxony-Anhalt has a long way to go as an East German state – foreign sales as a percentage of the total sales the manufacturing sectors is about 30%, well below the national average of 45%.
“The partial manifestation of xenophobia aggravates the situation,” says Holtemöller. On the one hand, this is a negative location factor: For example, in Saxony-Anhalt, the number of right-wing criminal offenses is twelve times higher than in Hesse. This makes it extremely difficult to attract qualified specialists from foreign countries to settle in East Germany.
“A one-sided orientation toward physical capital and technology will not help to bring East Germany forward. The key future drivers are human capital, creativity and open-mindedness,” summarises the Vice President.
Info Graphics
The German economy has overcome a period of weakness following reunification
Gross domestic product per capita, purchasing power parity, 2011, international dollar
Degree of openness of the German economy
Gross domestic product per capita, purchasing power parity, 2011, international dollar
Current account balance
Relative to gross domestic product, in %
Productivity differences in Germany between west and east
Gross domestic product in current prices per employee
East-west differences in productivity in companies of all sizes
East-west differences in productivity in companies of all sizes
Hardly any corporate HQs in East Germany
Headquarters of the TOP 500 companies in Germany 2016 ranked by DIE WELT
East-west productivity differences are smaller in rural areas than in cities
Gross domestic product per employee in urban and rural spaces in East Germany including Berlin, spatial category in West Germany = 100
Economic output per resident in German regions compared to European regions
Gross domestic product (GDP) in purchasing power parities (PPS) per capita 2016
Economic output per capita in East Germany higher than in the Visegrád countries
Gross domestic product per capita in purchasing power parities relative to Germany, in %
Germany‘s regional income disparity has lessened compared to other European regions
Variance of gross domestic product, lograrithmised, purchasing power parities
East Germany has only recorded a more favourable development of economic output than West Germany in 11 out of 26 years
Yearly rate of change of gross domestic product, price-adjusted, chain-linked, in %
Average wage: clear east-west divide in salaries
Median of monthly gross wages of full-time employees liable to the social insurance system; Germany = 100, 31.12.2017
Services are the main source of added value and employment
Absolute change in gross value added in current prices and in employment by industries
Underemployment rates: large regional differences
Underemployment quota in Germany = 100, 2017
Lack of capital of no significance for East Germany‘s productivity shortfall
Gross fixed assets at replacement costs in East Germany including Berlin relative to West Germany, in %
In East Germany, rural regions gained aboveaverage benefit from regional aid – but the period of generous subsidies is over
Investment grants to commercial businesses from 1991 to 2017
In East Germany, rural regions gained aboveaverage benefit from regional aid – but the period of generous subsidies is over
Investment grants to commercial businesses from 1991 to 2017
East-west migration: net emigration comes to a halt
Out-migration from East Germany to West Germany, in-migration to East Germany from West Germany, migration balance, from 1989 to 2015
Population development in East Germany: an increase from 2013 onwards as a result of overseas migration gains
Population development in East and West Germany in the period from 1990 to 2015 by components, yearly population change (number of persons)
Internal migration: the population of rural areas in East Germany has continuously declined since 1999
Balance of internal migration per 1,000 inhabitants
Decline in working-age population in East German territorial areas until 2060 more than twice as big as in West Germany
Index of development of population at employable age (20 up to below 67 years) based on the updated 13. coordinated population projection by the Federal Statistical Office, year 2015 = 100
Migration gains from the EU: significantly lower in East Germany than in West Germany
Cumulative net migration gain per 1,000 inhabitants, Germany = 100
EU blue card: Berlin has a clear lead
Blue card recipients per 100,000 employees in the federal states in 2017
Proportion of people with a migrant background in East Germany and rural regions well below the federal average
Share of population without and with migration background in 2017 in % (total population = 100)
Percentage of foreigners seeking asylum: well above average percentage in East German territorial areas, with a lower percentage of foreigners
31.12.2016
Specialist staff vacancies: a growing problem in East and West German companies
Vacancies, 2007 to 2017, in %
Part-time work: lower proportion of part-time staff in East Germany
Part-time employment and share of part-time employment in total employment, 1997 to 2017
Tertiary education is falling behind in East German territorial areas
Employment in the federal states by education level, ranked by the share of employees with tertiary education
Tertiary education is falling behind in East German territorial areas
Employment in the federal states by education level, ranked by the share of employees with tertiary education
Large regional differences in school drop-outs
Early school leavers: share of school leavers who do not possess a Certificate of Secondary Education in the total number of school leavers in 2016, Germany = 100
In East Germany and structurally weak West German states, SMEs make an above-average contribution to the economy‘s research and development spending
Internal R&D expenditures in the corporate sector by employment size of firms 2015, in % (total expenditures per state or region = 100)
Baden-Wuerttemberg, Berlin, Lower Saxony and Bavaria spend above-average amounts on research and development
Share of internal R&D expenditures 2016 in gross domestic product by federal states and regions, current prices, in %
Excellence clusters: East German territorial areas underrepresented in cutting-edge research, with the exception of Saxony
Share of the federal states in the 57 excellence clusters of German universities in relation to the share in total population in Germany, in %
In industry, companies of below-average size tend to be associated with lower export rates
Employees per enterprise, share of exports in total turnover, 2017, enterprises belonging to firms of the manufacturing sector, mining and quarrying of 20 and more employees
East Germany‘s transfer dependency has fallen, but still exists
Gap between expenditure and gross domestic product in East Germany including Berlin, absolute volume and relative to the GDP in West Germany
2017 tax coverage ratio: still an east-west divide
Tax revenues as a percentage of adjusted expenditures, in %
Not all municipalities anticipate demographic change in their investment decisions
Distribution of municipal investment in fixed assets per resident in Euro for the years 2013 and 2014
Publications on "East Germany"
Aktuelle Trends: Die Dienstleistungsmetropole Berlin ist für das Wachstum in Ostdeutschland wichtiger geworden
in: Wirtschaft im Wandel, No. 4, 2018
Abstract
Der Aufschwung in Ostdeutschland erfährt seit 2016 einen Tempowechsel, vor allem aufgrund unterschiedlich dynamischer Wirtschaftsbereiche: Die dienstleistungsorientierte Berliner Wirtschaft legt weiter zu, das Verarbeitende Gewerbe in Sachsen, Thüringen und Sachsen-Anhalt lässt nach.
Auswirkungen des gesetzlichen Mindestlohns im Handwerk in Sachsen-Anhalt
in: Zeitschrift für Wirtschaftspolitik, No. 2, 2018
Abstract
This paper examines the effects of the minimum wage introduction in Germany in 2015 on the skilled crafts sector in Saxony-Anhalt. Using novel survey data on the skilled crafts sector in Saxony-Anhalt, we examine three questions: (1) How many employees are affected by the minimum wage introduction in the skilled crafts sector in Saxony-Anhalt? (2) What are the effects of the minimum wage introduction? (3) How did firms react to wage increase? We find that about 8 % of all employees in the skilled crafts sector in Saxony-Anhalt are directly affected by the minimum wage introduction. A difference-in-difference estimation reveals no significant employment effects of the minimum wage introduction. We test for alternative adjustment strategies and observe a significant increase of output prices.
The Efficiency of Local Public-service Production: The Effect of Political Institutions
in: FinanzArchiv, No. 2, 2018
Abstract
Reforms replacing municipal cooperations by centralized municipalities often aim at increasing municipal efficiency. Empirical evidence supporting this aim, however, is ambiguous. Our paper analyzes the effect of institutions on municipal efficiency. In particular, we distinguish two archetypal institutional settings, a centralized and a confederal one, and argue that bureaucrats in a centralized setting are able to increase the fiscal residual. Our empirical test case is the German federal state of Saxony-Anhalt. We test the effect of the institutional setup using the bootstrap approach suggested by Simar and Wilson (2007), concluding that a decentralized institutional setting improves the efficiency of municipal production.
The Economic Development of Saxony-Anhalt since 1990
in: IWH Discussion Papers, No. 6, 2018
Abstract
This article describes the economic development of Saxony-Anhalt since 1990 in the context of the East German transition from a centrally planned economy to a market economy. In the early 1990s the economy of Saxony-Anhalt caught up quickly with West Germany, mainly because the capital stock was modernized and expanded. Convergence, however, has almost come to a halt for some time now and gross domestic product per employed person is still about 20% below the West German level. The challenge for economic policy is to further the catching-up process by fostering research and innovation and improving the skills of the workforce.
Statistical presentation of international trade in the course of German unification
in: Klaus Voy (Ed.): Außenhandel und Globalisierung in gesamtwirtschaftlicher Sicht. Marburg: Metropolis, 2018
Abstract
How did the German unification influence the development and the statistical presentation of he contemporary trade of the eastern and western part of Germany? The parallel presentation oft he regional gross domestic products and their demand components is he only way, to describe adequate the flow of goods and between both the two parts of the German economy as well as with the rest of the world.
