The impact of division and reunification on the economic geography of Germany
Final Report Abstract
The goal of our project was to exploit the division of Germany atid re-unification of East and West Germany to shed light on the empirical relevance of theories of economic geography. In particular we wanted to explore to what extent the location of economic activity is determined' by economic fundamentals, or whether sunk costs (for example in form of infi^structure) and agglomeration forces can give rise to multiple equilibria in the spatial distribution of economic activity as stressed in modem theories of economic geography following Paul Krugman (1992). In line with our proposal we have concentrated on two particular projects to answer these questions. In the first project ("airport project") we use the combination of the division and reunification of Germany to provide evidence in favour of the empirical relevance of muhiple equilibria in location. Prominent recent by Davis and Weinstein (2002) examines the Allied bombing ofjapanese cities as a large and temporary shock that varies substantially across locations. Surprisingly, they find that city populations recovered very quickly from the war-time shock and cities retum to their pre-war growth path within less than 20 years. They conclude from this evidence that location choices must largely be determined by fundamentals and that muhiple equilibria must be of primarily theoretical interest. In this project we focus on a particular industrial activity, namely an airport hub. We show that following division Germany's air hub has migrated from Berlin to Frankfurt and there is no evidence ofa retum ofthe air hub to BerUn atter reunification. We develop a body of evidence that the relocation ofthe air hub cannot be explamed by a change in economic fundamentals but is instead a shift between multiple steady-states. This paper has been invited for resubmission to the Review of Economics and Statistics and has recently been resubmitted. In the second project ("Berlin project") we analyse the impact of the division and reunification of Oermany in the microcosm of Berlin for which we have collected a wealth of spatially highly disaggregated historical data. We have constructed a balanced panel of 5162 blocks in West Berlin for the years 1936, 1986, and 2006 to explore the economic impact ofthe creation and fall ofthe Beriin Wall across localities in West Berlin. To guide our empirical work we extend Ihe model of Lucas and Rossi-Hansberg (2002). The basic prediction of the model is that the Berlin Wall changed relative productivity, wages and expected worker incomes, which in turn led to changes in the distribution of employment and residents. We show that the evolution of rent gradients in BeHin can be explained by the model with significant knowledge spillovers across localities and limited asymmetries in local amenities. We show that division and reunification did indeed impact differentially on areas of West Berlin depending on their location relative to concentrations of economic activity in East Berlin as suggested by the model. This paper will soon appear as a CEPR discussion paper and will be presented at intemational conference over the next year.
Publications
- (2008), "History and Industry Location; Evidence from German Airports" , a. pre-published as CEP Discussion Papers number dp0809, b. CEPR Discussion Paper No. 6345, and c. CSGR working paper No.229/07
Stephen Redding, Daniel Sturm, Nikolaus Wolf
- (2009), "The Economics of Density: Evidence from the Berlin Wall", mimeo, London School of Economics and Political Science
Gabriel Ahlfeldt, Stephen Redding, Daniel Sturm, Nikolaus Wolf
