Progress Report - East German Labour Market Policies and Measures to Promote Businesses in Need of Partial Reform

Second progress report concerning economic developments in East Germany, produced by various economic institutes (ZEW, DIW; LAB; IfW, IWH) on behalf of the Federal government.

Short version of the research report

As before, the development of the economy in Germany's new Eastern states remains sluggish. The question is what political bodies now can do to stimulate growth in the East German economy. Actually, in need of an answer to this question, the Federal Minister for Finance commissioned a number of economic research institutes to produce, "Progress Reports on the Economic Development of East Germany" (Fortschrittsberichte über die wirtschaftliche Entwicklung in Ostdeutschland) , and thereby analyse the efforts being made to stimulate the East German economy and labour market.

Alongside analysis of the technological capacities of East Germany's new states, the now finished report also provides a differentiated view of the infrastructure in each region, as well as analysis of efforts made to promote investment and innovation, and of current labour market policies.

The report indicates that investment incentives have led to a considerable amount of investment being made in East Germany. The consequences arising from bad investments should not, however, be underestimated. In addition, a considerable proportion of the positive effects resulting from investment incentives have simply fizzled out into adjustments being made in the markets. It has therefore been recommended that extra funding allocated to East Germany is combined with investment subsidies.

Policies to promote innovation have had a clear impact on the innovation capacity of the East German economy. Such policies mean that weaknesses in terms of research and development carried out by East German businesses are a thing of the past. The ratio of expenditures and returns associated with innovation activities, however, is still poor in comparison to that of West Germany.

Active labour market policies (ABM) have only managed to increase employment to a limited degree. ABM has failed to significantly impact employment at either the individual or regional level. The results from analysis of pay subsidies and efforts to incentivise further professional training are inconclusive.

Analysis carried out by economic institutes increasingly suggests that wide-reaching strategies, that have thus far been implemented to facilitate the development of businesses in East Germany, are ineffective. Particularly in view of the issues surrounding fiscal policy in Germany, it has been suggested that the targeted efforts to promote investment and innovation in the new Eastern states should be left to gradually run their course, while more focus should be placed on improving the efficiency of the implemented measures. The perspective is somewhat different, however, if one takes the active labour market policies (ABM) into account. The active labour market policies should not continue to be implemented in their current form. If political bodies wish to retain ABM policies, then measures must be developed to provide individuals who have little chance of finding employment in the labour market with financial aid via social tax policies. The burden from working must also be reduced. It has also been recommended that a differentiated analysis of further professional training measures (according to course type) be undertaken. As was previously the case, it should be made a priority to improve the conditions in the new Eastern German states, as this will also reduce the need for compensatory economic incentives. Essentially, an improvement in the economic situation in East Germany can only be expected, if the issue of a low level of growth throughout the entire German economy is solved.