Since Italy’s monetary unification some 155 years ago, income per capita in the South (the Mezzogiorno) has fallen from virtually the same level as in the Centre-North to little more than 55% of the Centre-North’s level. This column asks why East Germany hasn’t suffered the same fate since German monetary unification 25 years ago. East Germany is not like the Mezzogiorno because of labour market flexibility, different evolutions of the tradeable sector, and the weight of history.
Weight of history🙂 How did history play a role in more flexible labor markets and a more vibrant tradeable sector?
What is today East Germany was in the past among the more developed parts of the country (and of Europe), in contrast to the Mezzogiorno’s relative backwardness. Germany’s industrial revolution in the 19th century began in Saxony (in East Germany). By contrast, Italy’s 1861 unification led to a gradual process of de-industrialisation in the South of the country.
But the differences go further back in time. The relative lack of trust and social capital that characterises Southern Italy today, in contrast to the Centre-North, and that many consider one important reason for the region’s backwardness, may well be due to the prevalence over several centuries of absolutist regimes in the Mezzogiorno, as against the existence of relatively free city states in Central-Northern Italy (Guiso et al. 2008).
No comparable studies exist for Germany, largely because there were no such early stark cultural divisions across the country. So-called ‘free and imperial’ cities existed in both areas, the Hanseatic League was active in West and East alike, universities flourished from the later Middle Ages across the whole of Germany, and so on.
Trust and social capital could have been destroyed, however, by the 40-plus years of Communism. There is, indeed, survey evidence showing that East Germans still today display higher levels of social distrust than do their Western compatriots.
Yet, harder evidence, surprisingly perhaps, paints a much less unfavourable picture. Thus, the incidence of voluntary work, for instance, or the presence of non-profit organizations, or the frequency of organ donations (all indicators often deemed to indicate the existence of trust) are in East Germany either close to or even well above (in the case of organ donations) their levels in the West of the country. In the Mezzogiorno, by contrast, all these indicators show outcomes well below those of Central-Northern Italy.
Comparative research has shown that social capital and economic performance are positively linked and this could well be true for product complexity as well. Complexity usually requires numerous transactions and is thus likely to be helped by the presence of social capital and trust.
Superb stuff. Again none of this is emphasised in our economics teaching.