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On the Costs and Effectiveness of Tarjeting State Employment: Germany in the 1990s and China in the 2000s

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  • Sebastián Claro

    ()
    (Instituto de Economía. Pontificia Universidad Católica de Chile.)

Abstract

The German unification process imposed a significant price-cost squeeze on eastern firms. Important technology differences between the East and the West generated high pressures on the competitive position of eastern manufacturing firms when product and factor markets integration took place. In order to avoid mayor employment and output costs, the government subsidized eastern firms. A similar process is expected in China after accession into the WTO. The restrictions to foreign firms to access domestic markets have to be lifted, and hence significant cost pressures on native, specially state-owned enterprises, are expected. The projected employment shift from native to foreign firms suggests that the Chinese government may decide to slow down the transition process, as Germany did. This paper estimates the fiscal costs of artificially targeting state employment through product price subsidies rather than allowing factor reallocation. The subsidy needed to increase East Germany's manufacturing employment by 1% was around 0.9% of value-added prices, compared to a 1.2% subsidy if China targets state employment or 18.7% if China targets native employment. These numbers imply that the annual cost per worker targeted in Germany more than 13 times the cost per worker in China.

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Bibliographic Info

Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 218.

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Date of creation: 2002
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Publication status: Published as "Supporting Inefficient Firms with Capital Subsidies: China and Germany in the 1990s", Journal of Comparative Economics Nº 34, pp. 377-401, 2006.
Handle: RePEc:ioe:doctra:218

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Keywords: Integration; fiscal transfers; technology gap; Germany; China;

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  1. Felix Fitzroy & Michael Funke, 1998. "Skills, Wages and Employment in East and West Germany," Regional Studies, Taylor & Francis Journals, vol. 32(5), pages 459-467.
  2. Branstetter, Lee G. & Feenstra, Robert C., 2002. "Trade and foreign direct investment in China: a political economy approach," Journal of International Economics, Elsevier, vol. 58(2), pages 335-358, December.
  3. Stefan Bach & Dieter Vesper, 2000. "Finanzpolitik und Wiedervereinigung: Bilanz nach 10 Jahren," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 69(2), pages 194-224.
  4. Sebastián Claro, 2002. "Tariff and FDI Liberalization: What to Expect from China´s Entry into the WTO?," Documentos de Trabajo 209, Instituto de Economia. Pontificia Universidad Católica de Chile..
  5. George A. Akerlof & Andrew K. Rose & Janet L. Yellen & Helga Hessenius, 1991. "East Germany in from the Cold: The Economic Aftermath of Currency Union," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1), pages 1-106.
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