DP863 | Eastern Germany: Can't We Be More Optimistic?

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This paper argues that the application of the `2% rule' to the case of Eastern Germany, which implies convergence in three decades or more, is overly pessimistic. First, it ignores discrete improvements in initial conditions related to the transition, which have been significant to date. Because labour productivity in manufacturing exhibits wide sectoral dispersion, structural change is likely to increase aggregate productivity further. Second, convergence is also driven by physical and human capital mobility, which in contrast to labour mobility appears to be high in Eastern Germany. Finally, an unusually high rate of physical investment in Eastern Germany will accelerate convergence.