The unfinished convergence between East and West Germany: Patterns of Scale and Agglomeration Effects in East Germany

University essay from Lunds universitet/Ekonomisk-historiska institutionen

Abstract: Since the economic convergence between East and West Germany has come to a halt, the lack of scale and agglomeration effects is assumed to be contributing to this trend of stagnation. This paper studies the development of patterns of these effects in East Germany with an emphasis on the German reunification and economic integration process while accounting for asymmetries between East and West. Existing literature on the reunification process, scale and agglomeration economies theory as well as agglomeration effects studies of East Germany are reviewed and interpolated with quantitative data. The findings have been put in a wider context of economic integration and new economic geography. The findings reveal that scale and agglomeration economies are scarce and heterogeneously distributed across East Germany due to the Socialist mode of production and the transition period during reunification. The privatisation of the largely unproductive industrial stock in East Germany in combination with large-scale emigration have inhibited the formation of scale effects and industrial agglomeration on par with the West. Therefore, East Germany cannot exploit the effects of scale and agglomeration economies to the same degree as West Germany. It seems to be stuck in a disadvantageous position of economic asymmetry where it remains reliant on West German companies and their monetary and human capital. The urbanised core regions of the East, however, might assume a more central role in the German economy in line with their industrial past in the long term.

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