New Economic Geography and Reunified Germany at Twenty: A Fruitful Match?

Abstract

Abstract:We qualitatively match new economic geography (NEG) to stylized facts on German economic integration after 1989. We find that NEG may explain German integration reasonably well. Germany may currently be close to the peak of the bell curve, which describes the long-run relationship between integration and agglomeration in Germany. As a consequence, further economic integration between the two parts of Germany may eventually foster redispersion of economic activity toward East Germany. We also identify limitations of NEG for explaining German integration, most notably the analytical complexity of multi-region models and its neglect of knowledge spillovers and labor pooling. JEL: F12, F15, R12, R23

Spatial fragmentation of industries by functions

“…By using the level of the coefficient in 2007 rather than its growth rate as our indicator, we assume for simplicity that any manufacturing activity situated in East Germany in 2007 was "offshored" from West Germany after the fall of the Iron Curtain. The East German economy went through a fundamental reconstruction after the fall of the Iron Curtain, which was in fact shaped decisively by investments by West German firms (Bickenbach and Bode 2013). We take a location coefficient of greater than one, which means that the industry is overrepresented in East Germany, as an indication of disproportionately extensive offshoring to East Germany.…”

“…This period covers most of the globalization era and virtually the whole time span since the fall of the Iron Curtain. This requires excluding East Germany from the analysis, however, which was deep in disequilibrium during the 1990s (Bickenbach and Bode 2013). After the reunification shock in 1990, which turned half to two-thirds of the East German capital stock obsolete and reduced output by half within a single year, East Germany went through a deep structural transformation during the 1990s that was fueled by extensive public interventions, including heavy public subsidies of up to 50 % for capital investments.…”

Trade Openness, Transport Networks and the Spatial Location of Economic Activity

“…By contrast, with the reunification, they found signs of economic recovering in border regions. Bickenbach and Bode (2013) analyze the same phenomenon comparing qualitatively the parallelism between the NEG prediction and stylized facts on Germany economic integration. They conclude that NEG predictions matches quite well with the integration process, described as a U-curve between agglomeration (in East Germany) and integration, highlighting that Germany could be near to the turning point of the curve by the years 2001-2011.…”

Perpetuating regional asymmetries through income transfers

“…For example, Rowthorn (2010) explains that …scal transfers in Great Britain can help to reduce the North-South regional disparities. Bickenbach et al (2013) point out that public transfers toward East Germany increase the market potential of this region and nourish the dispersion of the economic activity. For the Chilean economy, Modrego et al (2014) simulate a positive shock in the market potential of Santiago, which reassembles the public transfers program applied in the country.…”