Reversing fortunes of German regions, 1926–2019: Boon and bane of early industrialization?

Paul Berbée, Sebastian Till Braun () and Richard Franke
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Paul Berbée: ZEW–Leibniz Centre for European Economic Research
Sebastian Till Braun: University of Bayreuth and IZA
Richard Franke: Trinity College Dublin and CEPH

Journal of Economic Growth, 2025, vol. 30, issue 2, No 3, 307-337

Abstract: Abstract This paper shows that nineteenth-century industrialization is an essential determinant of the pronounced changes in economic prosperity across German regions over the last 100 years. Using novel data on economic activity in 163 labor market regions in West Germany, we find that nearly half of them experienced a reversal of fortune, moving from the lower to the upper median of the income distribution or vice versa, between 1926 and 2019. Exploiting plausibly exogenous variation in access to coal, we show that early industrialization led to a massive decline in the per capita income rank after World War II, as it turned from an asset to economic development into a liability. We present evidence consistent with the view that early industrialization created a lopsided economic structure dominated by large firms, which reduced adaptive capacity and local innovation. The (time-varying) effect of industrialization explains most of the decline in regional inequality observed in Germany in the 1960s and 1970s and more than half of the current North-South gap in economic development.

Keywords: Industrialization; Economic development; Regional inequality (search for similar items in EconPapers)
JEL-codes: N93 N94 O14 R12 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10887-024-09247-x

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