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Hamburg leads German location index
but southern states are catching up

By James Monaghan

20 December 2003: The states (Länder) of eastern Germany, formerly the communist German Democratic Republic, and Germany’s capital Berlin are falling behind the states of western Germany as attractive business locations, according to a survey by Bertelsmann Stiftung (Bertelsmann Foundation). The survey names Hamburg as the best German business location.

The Bertelsmann rankings are based on a formula devised by a group of statisticians led by the Würzburg economist, Norbert Berthold. The formula includes employment, income and security as its components. Employment is defined as a ratio of unemployed to employed, income measure per capita state GDP together with the growth of state GDP, while security takes into account the number of people claiming social security benefits (social security) and the number of unsolved crimes (internal security). Points gained in these areas were added together to create the so-called ‘Success Index’. On the basis of these figures, the periods 1996 to 1998 and 1999 to 2001 were compared with each other.

Germany’s northern city state of Hamburg remains on top of the current Bertelsmann ranking of German business locations. The east German states of Brandenburg and Saxony-Anhalt (Sachsen-Anhalt) occupy the bottom two places.

Germany is a federal republic consisting of 16 states each with a significant degree of regional autonomy. The new states of Saxony (Sachsen), Saxony-Anhalt, Thuringia (Thüringen), Mecklenburg-Vorpommern and Brandenburg constitute what was previously communist East Germany. Berlin, now a federal state, used to be divided into East Berlin, a part of East Germany, and West Berlin, linked with the former West Germany.

Since reunification the former East German states have had problems catching up with the former West German states. The present report shows that these problems are becoming more marked. In addition there is also an increasing trend for the former West German states to split along a North-South gradient. The states of the northern plains are being left significantly behind by those in the south.

The conclusion of the Bertelsmann Foundation, a politically neutral think-tank dedicated to reform in education, economy, social affairs, health and international understanding, is that it is high time the status of federalism in Germany is re-examined and reformed. Only by giving the individual states a freer hand can healthy competition between the states be encouraged to the benefit of their citizens. Although Hamburg is still top of the ‘Success Index’, Bavaria (Bayern), Baden-Württemberg and Hesse (Hessen), the other top performers, have narrowed the gap significantly. Hamburg's weakness lies mainly in the areas of social security and crime, significant factors in the change of government in 2001. In mid-table are Bremen, the Saarland, the Rhineland Palatinate (Rheinland-Pfalz), North-Rhine Westphalia (Nordrhein-Westfalen), Schleswig-Holstein and Lower Saxony (Niedersachsen), all former West German states. Saarland shot up from 10th to 6th place, while Lower Saxony slipped from 7th to 10th.

Bringing up the rear are the old communist East German states of Berlin, Saxony, Saxony-Anhalt, Thuringia, Mecklenburg-Vorpommern and Brandenburg, the state surrounding Berlin. Worse, their performance since 2001 has deteriorated, so that the hoped for convergence that was supposed to follow reunification is further off than ever. Brandenburg slipped four places from 11th to 15th.

In addition to the ‘Success Index’ in terms of their attractiveness to incoming business and commerce, the economists developed a so-called ‘Activity Index’, where local politics were rated in terms of how active each state was in taking measures to promote the improvement of the standard of living of its citizens. The ‘Activity Index’ gives an indication of what to expect in terms of the ‘Success Index’ in two years time. Here the top performers are the southern states of Baden-Württemberg and Bavaria. The broad mid-field constitutes Rhineland Palatinate, Lower Saxony, Hamburg, North-Rhine Westphalia, Hesse, Schleswig-Holstein and Saarland. Bringing up the rear again are Thuringia, Berlin, Saxony-Anhalt, Brandenburg and Mecklenburg-Vorpommern. Compared with the first ranking of federal states in 2001, the changes in the current survey are trivial. Berlin suffers particularly through weak growth and rising unemployment. The only factor that differentiates it from the other 'new' states is the significantly higher per capita income, which derives from West Berlin's previous inclusion in the former West German economic sphere.

The Bertelsmann foundation sees the cause of the lack of competition between the states as derived from the allocation of responsibilities handed down from the old days of the Federal Republic of (West) Germany. The institutional frameworks and the federal distribution of jurisdiction stifle competition. In the present circumstances, competition between locations can only take place "with the handbrake on". Tax and social policies, as well as wage policies, are already largely out of the control of the individual states. In addition, the system of vertical and horizontal financial adjustment between the states distorts institutional competition of the states and hampers growth and business between buyers and sellers.

An increase in federalism would not only enhance competition between the states, it would also bring increased business efficiency and increased growth and employment. This means that the reform of the federal system is essential, and should be included in political decision-making as soon as possible.

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