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Depressing Dependence? Transfers and Economic Growth in the German States, 1975-2005

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  • Thushyanthan Baskaran
  • Lars P. Feld
  • Sarah Necker

Abstract

Most countries pay substantial intergovernmental transfers to poor regions. Since these transfers are often paid with the aim of achieving regional convergence, they should have a positive effect on economic growth. However, it is equally possible that transfers perpetuate under-development by diminishing regional incentives to implement growth-enhancing policies. In this paper, we study empirically the effect of intergovernmental transfers on economic growth using the German federation as an institutional laboratory. Our findings, which are based on a panel dataset covering the West German States over the period 1975-2005, suggest that transfers are irrelevant or possibly even harmful for economic growth. The results of our analysis of transmission channels are consistent with the notion that transfers fail to foster growth because states use them to subsidize declining industries.

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  • Thushyanthan Baskaran & Lars P. Feld & Sarah Necker, 2016. "Depressing Dependence? Transfers and Economic Growth in the German States, 1975-2005," CESifo Working Paper Series 6055, CESifo.
    • Handle: RePEc:ces:ceswps:_6055
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    4. Eduardo A. Haddad & Luis A. Galvis & Inácio F. Araújo-Junior & Vinicius A.Vale, 2018. "Impact Assessment of Scenarios of Interregional Transfers in Colombia," Documentos de Trabajo Sobre Economía Regional y Urbana 16767, Banco de la República, Economía Regional.
    5. Raphael Corbi & Elias Papaioannou & Paolo Surico, 2019. "Regional Transfer Multipliers," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(5), pages 1901-1934.
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    More about this item

    Keywords

    intergovernmental transfers; economic growth; fiscal federalism;
    All these keywords.

    JEL classification:

    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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