Will East Germany Become a New Mezzogiorno?

Despite massive regional policy efforts, GDP per capita in Southern Italy has only briefly converged on Northern Italian levels in the 1960's. Failure of convergence since then is associated with a policy switch from investment toward income maintenance, with reduced wage sensitivity to regional labor market conditions and with increases in rent-seeking opportunities and corruption. East Germany's early experience of rapid wage and income, but not productivity, convergence raised fears that aMezzogiornoscenario could be repeated. Since then, however, investment and productivity have risen while wage setting has become more flexible. Given East Germany's greater “social capability” for growth, and provided that investment continues to be encouraged, the prospects for convergence are now more promising.J. Comp. Econom.,June 1997,24(3), pp. 241–264. Magdalen College, University of Oxford, Oxford OX1 4AU, United Kingdom; University College London, London WC1E 6BT, United Kingdom; and School of Oriental and African Studies, University of London, London WC1H 0XG, United Kingdom.     

Prudence or Profligacy: Deficits, Debt, and Fiscal Consolidation

Over the last quarter century, public finances have been underpressure in most OECD countries as deficits and debts rose underthe pressure of relatively slow growth and high interest rates.This, in turn, has affected the welfare state, since effortsat containing deficits have often been concentrated on publicexpenditure. Much of the literature argues that this is desirable,since curbing deficits via tax increases seldom succeeds. Amedium-term survey of OECD country experience suggests a lessclear-cut conclusion. In a number of countries which were ableto curb debt/GDP ratios, the bulk of the adjustment did, indeed,come from spending cuts (but was, also, in some cases helpedby rapid growth and/or currency depreciation). In several, however,tax increases also appear to have succeeded in reducing deficitsand debt. Footnotes ¹ E-mail addresses: andrea.boltho{at}magd.ox.ac.uk; andrew.glyn{at}economics.oxford.ac.uk     

Why has Europe not co-ordinated its fiscal policies?

Traditionally, economic policy co-operation in Europe has taken the form of setting common rules rather than taking discretionary action. This picture did not change in the 1980s. Despite high unemployment and decelerating inflation, the EEC countries refrained from any co-ordinated expansionary fiscal policy. One reason for this may have been the surprisingly divergent views held by the policymakers of the four major economics on how such policies operated. While expansionary fiscal stances were universally condemned, the reasons given diverged widely. More important, however, than such intellectual confusion, was a common political determination to reduce public debts and public expenditure, diminish the role of the welfare state and restore the power of market forces.     

Why East Germany did not become a new Mezzogiorno

Economic integration is generally thought to favour convergence in the economic performance of previously separated regions; but this is far from universally true, as the experience of the members of the Eurozone testifies. The paper considers the two sharply contrasting cases of East and West German convergence following reunification and the enduring poverty of the Italian Mezzogiorno since Italian unification a century and a half ago. In both countries, political integration delivers much higher consumption in the lagging relative to the leading region than of per capita GDP. Consumption convergence can be supported by transfers but ‘production’ convergence ultimately requires catch-up in the production of tradeables. The paper demonstrates the radically different performance of the tradeable sector in the two cases, and suggests that this may be the result of differences in labour market flexibility, in investment performance and in the social norms required for the production of complex manufacturing.     

China's Emergence: Prospects,Opportunities and Challenges

Barring major disruptions, China will become the world's most dynamic growth pole, and could become one of the world's largest economies, if not the largest, by the year 2020. Industrial countries, especially Japan and the United States, are expected to benefit, while many developing countries may be put under competitive pressure. A simulation analysis shows that in the long run China will be resilient to adverse external developments, but in the short term, a shock such as loss of most favoured nation status in the US market could threaten the macroeconomic stability so important to its continued economic opening. Preserving open trade relations is in the best interest of both China and the United States.     

The assessment: Japan's stagnation - can policy revive the economy?

For a decade now Japan has virtually stagnated. Some blame thison a succession of unfavourable shocks that began with the burstingof the 'bubble' economy. More appropriate macroeconomic policies,targeting inflation and/or the exchange rate, could, in thisview, lead to a revival. Others argue that the country's problemsare deeper seated and require major structural reforms. Manyaspects of Japan's distinctive economic system should, in thisview, be either jettisoned or profoundly changed. It is unlikelythat demand-management policies can add much to what they havedone so far. Deregulation is needed in many areas and would,no doubt, help, but a wholesale rejection of erstwhile institutionsand practices does not seem on the cards and might well be disruptive.     

The assessment: the twentieth century

The past century saw unprecedented rises in life expectancyand living standards. It also witnessed major structural changes,the rise of 'big government' and two globalizations. Yet, thecentury's economic history was marred by policy and market failuresresulting in a massive world-wide depression, frequent financialcrises (particularly in the developing world), and several inflationspurts. Central planning set back development for one-thirdof the world's population; transition to the market economywas at best slow, in some instances disastrous. Income distributionwithin countries changed little, while productivity convergencebetween rich and poor economies was virtually absent. Policy-makinglearnt some lessons from the 1930s experience, particularlyin the areas of macroeconomic management, international cooperation,and free trade. Dogmatic recipes, however, were often resortedto at home, aided and abetted by the pretensions of the economicsprofession.