GLOBALIZATION
Germany Fears Deindustrialization - How Proactive Regional Policy Can Provide Relief
In a new study for the Forum, Jens Südekum analyzes what lessons can be learned from the German coal phase-out for other regions affected by the transition, what role innovative moonshot projects play - and why policymakers need to become more proactive.
BY
SONJA HENNENPUBLISHED
12. DECEMBER 2022READING TIME
6 MIN
Germany’s industrial regions are under stress. The energy crisis threatens to widen regional disparities that have been exacerbated by decades of poorly managed globalization. Individual regions fear their descent; there, sales and jobs are at risk. Deindustrialization and the erosion of prosperity are a threat, especially for rural regions. Here, individual regions are already under heavy pressure from the inevitable challenges of economic transformation: production must become more climate-friendly, more digitized, less dependent on inputs from autocratic regimes; and all this must happen in an environment with rapidly aging workforces, a shortage of skilled workers, stressed global value chains and growing social inequality. And a look at the U.S. (and eastern Germany) shows that if industrial workers lose their jobs in large numbers, breeding grounds for (right-wing) populist forces quickly emerge.
Not least for this reason, proactive regional policy to support and cushion local transformation processes is receiving increasing attention – in economist circles as well as in politics. By trying to promote spatial economic cohesion, regional policy has become an attempt to counteract populist trends against the backdrop of transformation, and to save industries, regions as well as liberal democracies as a whole.
Economist Jens Südekum analyzes the newfound importance of regional policy in a recently published Forum paper and discusses the extent to which the coal phase-out can serve as an example for other regions affected by change and thus a successful proactive industrial policy.
The paradigm shift in regional policy
According to Südekum, regional policy has been rather reactive for decades. Action was usually taken only when local labor markets had already come under massive pressure. This was not least due to the dominant economic paradigm, which, based on the Rosen-Roback model (a spatial version of the neoclassical equilibrium model), states that regional policy is inefficient on a large scale and cannot be justified economically. This claim is based on the assumption that workers, like firms, are fully mobile within a country and therefore choose their location optimally. Policies that distort this choice, e.g., by diverting economic activity from productive core cities to unproductive remote areas, thus inevitably lead to productivity and output losses at the national level. Policies should therefore follow the laissez-faire principle, the model posits. Certainly, according to Südekum, this paradigm in its pure form never completely dominated actual policymaking in either Europe or the United States. Nevertheless, proactive regional policy was rather frowned upon for a long time.
But recent theoretical and empirical research increasingly challenges the traditional spatial equilibrium model and its assumption that place-based policies are merely an inefficient interference in market-based resource allocation.
Together with transformation-related challenges and political developments such as the 2016 Brexit vote or the election of Donald Trump, the economic paradigm shift has made proactive regional policy respectable – and relevant – again among mainstream economists.
„Ein zeitgemäßerer Ansatz zur Regionalpolitik könnte eine proaktive Haltung einnehmen. Die Politik sollte nicht warten, bis die lokalen Arbeitsmärkte unter Druck geraten, bevor sie handelt. Vielmehr könnte sie versuchen zu antizipieren, welche Regionen in ihren anstehenden und laufenden Transformationsprozessen mit akuten Problemen konfrontiert werden.“
The German coal phase-out as an example of proactive regional policy.
In June 2018, the German government established a one-time advisory body (the “Coal Commission”) to develop plans for phasing out lignite mining in Germany while reducing the adjustment burden on affected regions. The Commission’s recommendations were presented in January 2019 and ultimately led to the ratification of two laws in July 2020. The first law (“Coal Phase-out Act”) contains a detailed timetable for the phase-out of coal-fired power generation by 2038 and compensation payments for the operating companies. The second law (“Structural Strengthening Act”) creates the basis for extensive structural aid for regions in Germany where lignite mining is spatially concentrated. According to Südekum, the most striking aspect is how much money the affected regions receive – at the equivalent of 2 million euros per job, considerably more than what governments normally spend on structural adjustment programs or other regional policy measures.
According to Südekum, this can be explained on the one hand by the fact that overcompensation of potential losers is necessary to buy political support for climate policies, the benefits of which only materialize in the long term. Indeed, some lignite regions have been strongholds of right-wing populism in previous elections, with AfD vote shares sometimes exceeding 40%. Obviously, there is concern that further job losses due to the decline of the lignite industry could exacerbate this discontent. This is especially true when disadvantaged regions were once successful in the past and then suffered painful losses and upheavals of their local industrial structures, which fueled resentment among the population. The best example, according to Südekum, is Germany’s Lausitz region, whose decline has been going on for decades – fueled first by German reunification and later by rampant globalization.
On the other hand, however, the coal phase-out offers policymakers the opportunity to create a test laboratory for industrial transformation. The regional subsidies for the coalfields are therefore not mere compensation for the phasing out of an important industry, but rather a nucleus for a clearly defined research and development strategy, for complementary infrastructures and for the scaling of innovative production activities and new, green technologies. After all, Südekum said, it is not only the lignite industry that is currently undergoing profound structural change, but also many other sectors, including the flagship automotive industry with its 1.6 million employees. However, Südekum analyzes that a financial subsidy of a comparable size to the coal subsidies could not be expected in these regions. Such a massive subsidy is only possible because coal involves three limited regions.
Therefore, it is all the more important, he writes in the paper, that the coal regions live up to their role as model regions and laboratories, so that other regions will later have the opportunity to copy the successful elements. According to Südekum, however, the implementation of this principle has not yet proven successful in practice. Groundbreaking, exploratory measures or moonshot projects – innovative technologies to combat climate change, for example – have hardly been implemented, he said. Too often, the approaches followed well-trodden paths. This can be explained, not least, by the fact that local actors were unable to quickly identify enough suitable projects to use up the generous funds.
"This is a missed opportunity to test how powerful a proactive regional policy could be and how to fully realize its potential."
According to Südekum, more serious problems with the transformation are to be expected above all in those regions that are predominantly home to small and highly specialized companies. These companies often no longer invest in further training and retraining, precisely what employees need to find new jobs. Proactive regional policy is all the more needed here, he said.