DP1256 Will East Germany Become a New Mezzogiorno?

Author(s): Andrea Boltho, Wendy Carlin, Pasquale Scaramozzino
Publication Date: February 1996
Keyword(s): Convergence, Regional Development, Regional Economic Policy
JEL(s): O57, R12, R58
Programme Areas: Transition Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1256

Despite massive regional policy efforts, GDP per capita in Southern Italy has only briefly converged on Northern Italian levels (during the 1960s). Failure since then is associated with a policy switch from investment towards income maintenance, with reduced wage sensitivity to regional labour market conditions and with increases in rent-seeking opportunities and corruption. East Germany?s early experience of rapid wage and income, but not productivity, convergence raised fears that a Mezzogiorno scenario could be repeated. Since then, however, investment has been successfully encouraged, wage setting has become more flexible and productivity growth has risen. Given a more favourable non-economic environment as well, the prospects for East German convergence are now more promising.