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Eastern Germany: can't we be more optimistic?

Author: Burda, Michael C. ; Funke, MichaelINSEAD Area: Economics and Political Science Series: Working Paper ; 93/63/EPS Publisher: Fontainebleau : INSEAD, 1993.Language: EnglishDescription: 24 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: This paper argues that the application of the "2% rule", which predicts convergence in three decades or more, is overly pessimistic in the case of Eastern Germany. First it ignores discrete improvements in initial conditions related to the transition, which have been significant to date. Because labor productivity in manufacturing exhibits wide sectoral dispersion, structural change is likely to further increase aggregate productivity. Second, convergence is also driven by physical and human capital mobility, which in contrast to labor mobility appears to be high in Eastern germany. Finally, an usually high rate of physical investment in Eastern Germany will accelerate convergence
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This paper argues that the application of the "2% rule", which predicts convergence in three decades or more, is overly pessimistic in the case of Eastern Germany. First it ignores discrete improvements in initial conditions related to the transition, which have been significant to date. Because labor productivity in manufacturing exhibits wide sectoral dispersion, structural change is likely to further increase aggregate productivity. Second, convergence is also driven by physical and human capital mobility, which in contrast to labor mobility appears to be high in Eastern germany. Finally, an usually high rate of physical investment in Eastern Germany will accelerate convergence

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