Economic Clusters Eastern Promise

Eastern Germany has made great progress since reunification, but support for the economically depressed region needs a new approach.
Castles in the clouds. A view of the Jena skyline.

Eastern Germany stretches from the beaches of the Baltic Sea to the forests of Thuringia. Former Chanceller Helmut Kohl referred to the “blossoming landscapes” of the region and it is easy to see why.

The area has good infrastructure, carefully restored cultural monuments and many pretty historic town centers. Even the once stubbornly high unemployment rate has finally dropped to single digits. However, the economy, as measured by per capita gross domestic product, is still just 67 percent of western Germany. If we want to change that, our politicians will need the courage to move away from blanket subsidies for the region to more targeted financial aid focused on sparking growth.

An index from the Cologne Institute for Economic Research comparing productivity, workforce skills, unemployment and entrepreneurialism puts eastern Germany at only 74 percent of western levels. That figure can be easily improved, by putting the bolstering and expanding the few centers of economic strength that exist in the region.

The eastern city of Jena is a case study in how to make this work. The city has become the focus of an economic “cluster” with local industry, universities and research institutes all contributing.

The cluster could not prevent the loss of 20,000 jobs at the city’s state-controlled firm, but it has encouraged the  return of western-based firms lens makers Carl Zeiss, and glass specialists Schott. The cluster also helped Lothar Späth, a former CDU politician, restructure the once state owned opto-electronics firm Jenoptik.

Companies, entrepreneurs and scientists now work very closely together. The concept is less about providing tax write-offs and more about investing in industrial spaces for new companies and founders. The result? A very low unemployment rate.

It’s not welfare benefits that create growth, but rather a good political framework for support based on good business models

Leipzig, Dresden and Eisenach have all used a similar key to success: old and new industrial firms from the automotive and microelectronics clusters were woven together with scientific institutions. The state of Brandenburg has profited from its growing ties to the capital Berlin – certainly more so than from misguided investment in projects like the building a car racetrack in the 1990s.

Local authorities missed a trick when building an airport for the region. Instead of creating an international air hub near Leipzig, sparse funds were spread across three smaller, inefficient airports in Leipzig, Erfurt and Dresden.

The lessons from the past 25 years show state subsidies must be concentrated on working economic structures and sustainably networking models. Everything else is wasted. Whether eastern Germany is successful depends less on transfers from the west and more on budgetary policies and investment. In 2013, all five eastern German states managed to book a budgetary surplus. Saxony has the greatest investment potential, predominately because of its solid finances.

But what sort of future do economically depressed regions like Western Pomerania and Lusatia have? This is where good digital and transportation infrastructure counts, so companies can access larger urban areas.

And, importantly, politicians have to ensure companies are not disadvantaged compared to the competition in neighboring Poland and the Czech Republic.

Germany’s plans to introduce a mandatory minimum wage will not help. Sectors including the trades, industry and tourism near Germany’s eastern border will suffer from the higher labor costs. Higher wages are only justified by higher productivity, but this only comes  with new businesses, investment in research and making sure exports meet high international standards: the things the companies around Jena have managed to do.

It’s not welfare benefits that create growth, but rather a good political framework for support based on good business models. The developments in eastern Germany are textbook example of how cities can be successful when they have a proper foundation to work from – and when they don’t.

 

Michael Mertin is chairman of the board for Jenoptik and vice president of the Christian Democratic Union’s economic council. To contact the author: [email protected]