Events

Dr. Sina T. Ates
Principal Economist
Federal Reserve Board

Even 30 years after the reunification, regions in East Germany (the former socialist GDR)
live in considerably different economic conditions, with the average GDP per capita, for example,
still about 20 percent below the average level in the West German regions. In this
paper, we explore the obstacles that impeded full convergence despite massive support to the
East with a particular focus on differences in firm behavior. In the immediate aftermath of
the reunification, production in the former GDR exhibited a rapid catch-up with the West
with a pick-up in labor productivity. But the convergence then lost steam quickly with a stark
difference between East and West German firms’ product qualities persisting ever since. We
build a quantitative model of innovation, competition, and regional integration that is able to
replicate these dynamics and provides a suitable setting to evaluate alternative policies that
could have altered these dynamics. Interestingly, delaying the unification and opening up to
competition from the West would not help the Eastern firms to build up capacity. Alternatively,
sustained support for R&D in the East or to technology spillovers via licensing from
the West would have helped shrink persistent gaps in product quality and income.