Why East Germany Did Not Become a New Mezzogiorno

 On the 11th of April, Professor Pasquale Scaramozzino held a Global Conversation in the Economics Faculty of Tor Vergata. He graduated from La Sapienza with a Laurea summa cum laude in Scienze Statistiche ed Economiche in 1984 and pursued his Ph.D. at the London School of Economics and Political Science in 1990. The Professor was also a consultant for the Asian Development Bank, NCCR – Swiss National Centre of img36648Competence in Research on Trade Regulation, UN – Food and Agricultural Organization, and the World Bank. His recent research interests are on development economics and applied econometrics.

His works include articles in referee journals, chapters in edited books, articles on medical statistics, teaching publications, discussion papers and multimedia supports.
However other than research, Professor Scaramozzino also dedicated himself to teaching from 1988 to 1989 at the University of Bristol and until 1994 at University College London.

His presentation to the Global Governance students of Tor Vergata was based on the article of “Why East Germany Did Not Become a New Mezzogiorno” (with Andrea Boltho and Wendy Carlin).

Since Italy’s monetary unification 155 years ago, income per capita in the South (the Mezzogiorno) has fallen from the same level as in the Centre-North to little more than 55% than its original level. So the question is:  if Eastern Germany only achieved its monetary unification 25 years ago, why hasn’t it suffered the same fate, or perhaps even worse? East Germany differs from the Mezzogiorno because of some essential characteristics like labour market flexibility, different evolutions of the tradable sector, and the weight of history that all strongly affected its economic growth after its monetary unification.

At the time, in fact, East Germany’s income per capita only reached 40% of the West’s level, however it has increasingly converged towards it since the end of the war, reaching 2/3 of Western Germany’s per capita.

When analyzing the situation of both countries, according to the traditional theory, and observing the process of growth over time, regions that are closer to the technological frontier tend to grow less. Paradoxically, when a country is less developed, it will tend to develop more rapidly (because of decreasing returns).

This process of convergence does take place in a number of different contexts, even if at a slow rate. Eastern Germany was therefore somehow advantaged with respect to the Mezzogiorno as it started as a less developed area. Furthermore, international trade supports this view. This is mainly because countries specialize in production of commodities in what they have an advantage, trade then leads to some kind of equalization across regions.

However, when taking into consideration the endogenous growth theory, growth takes place because of intervention in research & development and education.

For example, according to Enrico Moretti, Berkeley, the new geography of Jobs determines that towns and regions that have most invented in research, technology and education, attract high-skilled workers and cause an agglomeration, exacerbating the inequalities among territories.

An example at an international level is India, that had a federal structure and embarked in a process of liberalization growing its economy incredibly.

The problem, however, which is what occurred in Italy, is that in the long run the neglection of research and development especially in some areas only causes rich states (or regions in this case) to turn out to be richer and inequalities turn to be bigger over time. There can be a convergence within some specific areas in a country (like the northern regions), but not necessarily between the two areas.

Germany took care of an important factor for development right away: namely, competitiveness. Actually, it not only improved competitiveness, but also increased capital investment and social capabilities. A number of social indicators could point at better growth prospects.

An essential element which is necessary for this growth and that could strategically be important for southern Italy is trade.

Global increase of foreign trade had an important role both in Italy and in Germany. Mezzogiorno is however very much behind the rest of the country with respect to Germany as a whole. It could be trade causing growth, but also growth causing trade. And contrarily to appearance, trade could lead to a much bigger effect in Italy than in Germany. Looking at the figures showing the difference in investment in machinery and equipment, one can observe how unit labour cost has fallen very sharply in East Germany with respect to the West, whereas in Mezzogiorno it has experienced growth. Growth potential of countries can also be indicated in terms of complexity of their products: the degree of complexity is an indicator of the level of skills and the growth potential. These can also affect the level of trade.

Starting as a completely uncompetitive State at the time of unification, East German unit labour costs are now equal to those of West Germany mainly due to trade union flexibility and wage moderation. This process did not occur in Southern Italy, an area whose relative competitiveness has remained low, or worsened even, throughout the post-war period.

This is mainly caused by the de-industrialization in the last 20 years and low productivity levels in contrast with the quick rise in productivity in East Germany which reached parity with the West by 2004.

 

Anna Bruschetta and Estelle Balussou

 

Image source: https://www.pinterest.com/pin/527976756294095526/

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