ABSTRACT
The “Joint Task for the Improvement of Regional Economic Structures” (GRW) is the
key instrument of economic policy making in Germany in order to foster economic
development in lagging regions. Introduced in the late 1960s the instrument has also
been adapted to subsidize private sector physical investments and public infrastruc-
ture in East Germany. In this paper we analyse the effect of GRW funding on labour
productivity growth of 225 German labour market regions for the period 1994 to
2006. The empirical regression approach builds on a “Barro-type” growth equation,
where a special focus is given to the policy instrument as additional right hand side
regressor. The results show that for different model specifications we find a signifi-
cant positive direct effect of the regional policy instrument on labour productivity
growth. Using a growth model framework we can show that the speed of conver-
gence towards the region’s steady income is almost doubled for countries far away
from their steady state compared to the case of not being supported. In order to
check for the robustness of the results we also augment the standard regression
approach to the field of spatial econometrics. If we additionally include further spatial
lags of the right hand side regressors in the growth equation, the estimated coeffi-
cients for the resulting Spatial Durbin and Spatial Durbin Error model indicate that
there is a negative spillover effect from the GRW policy on neighbouring regions.
This effect remains stable, if we add further spatial lags of other explanatory va-
riables. The negative indirect effect may be explained by the increased attractive-
ness of the supported region, which is able to redirect physical investment and other
input factors. The indirect distorting effect of the GRW programme yields to a slow-
down in the speed of adjustment to the steady state income, however the overall
effect of the GRW remains still positive.