Working Paper: CEPR ID: DP863
Authors: Michael Burda; Michael Funke
Abstract: This paper argues that the application of the `2% rule' to the case of Eastern Germany, which implies convergence in three decades or more, is overly pessimistic. First, it ignores discrete improvements in initial conditions related to the transition, which have been significant to date. Because labour productivity in manufacturing exhibits wide sectoral dispersion, structural change is likely to increase aggregate productivity further. Second, convergence is also driven by physical and human capital mobility, which in contrast to labour mobility appears to be high in Eastern Germany. Finally, an unusually high rate of physical investment in Eastern Germany will accelerate convergence.
Keywords: German unification; convergence; eastern Germany; factor mobility; regional integration
JEL Codes: F15; F20; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| initial productivity levels in eastern Germany (O52) | overly pessimistic forecasts based on the 2% convergence rule (E17) |
| high mobility of physical and human capital in eastern Germany (J60) | accelerate the convergence process (O47) |
| unusually high rates of physical investment in eastern Germany (E20) | extraordinary effects on productivity and living standards (O49) |
| structural changes in the economy (L16) | enhance productivity (O49) |
| investment impacts (F69) | productivity improvements (O49) |
| sectoral shifts (L16) | productivity improvements (O49) |