The Societal Costs of Economic Decline

Funding: DFG

Term: 2021 bis 2023

Team: Juniorprofessor Dr. Andreas Lichter (Applicant)

Cooperation Partner: Dr. Max Löffler (Maastricht University)

Abstract

In this project, we will analyze whether the notable rise of populism in East Germany can be linked to the economic turmoil that hit the country in the aftermath of the fall of the Berlin Wall. Various contemporary accounts have argued that this unexpected and long-lasting economic downturn caused sentiments of negligence, frustration, and economic insecurity among East German citizens that ultimately served as fertile ground for today’s populist rhetoric. We will put these claims to a rigorous empirical test by drawing upon fine-grained regional data from both before and after reunification as well as state-of-the-art identification strategies. To this end, we will first combine and harmonize various administrative data sources on local employment and economic activity from both the times of the German Democratic Republic and post-reunification Germany. We will then draw upon this dataset to investigate (determinants of) regional differences in the economic downturn that followed Germany’s reunification. We hypothesize that the extent of the ``economic shock of reunification’’ differed substantially across East German regions because of their differential industrial composition during the times of the socialist regime, and the fact that some Eastern industries almost met the West German productivity standard while others were remarkably unproductive. To test this hypothesis, we will draw upon existing industry-level measures of the East-West productivity gap for the late 1980s and calculate for each East German municipality its implied productivity gap to the West, subject to its pre-reunification composition of industrial employment. We will then relate this measure of local productivity to municipalities’ evolution of employment post reunification. In the final part of the proposed project, we will eventually link the extent of the local economic shock of reunification in the early 1990s to local voting behavior in the 2010s. However, simple correlations of this relationship are most likely biased – e.g., due to persistent regional differences in political preferences, concurrent time-varying policy differences, or endogenous economic development post reunification. To establish causal effects, we will therefore implement an instrumental variables strategy that will allow us to isolate the exogenous component in the observed local post-reunification employment shocks that is merely due to local productivity differentials prior to reunification.