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Dresden Branch
Dresden Branch
The Ifo Dresden branch studies the progress of systemic change in east Germany (with special focus on
Saxony), especially its economic implications and consequences. It also monitors and evaluates economic
developments in the EU accession countries. At the
same time Ifo Dresden offers consulting services to
economic policymakers and serves as a forum for
researchers, politicians and entrepreneurs. Ifo Dresden
publishes the bimonthly journal “ifo Dresden berichtet”
(in German). In addition, major research results with
focus on Saxony and eastern Germany are published
in “ifo Dresden studien” (in German). The branch receives institutional funding from the Free State of Saxony. It is also supported with expertise and resources
by Ifo Munich.
services in Saxony are published in the journal ifo
Dresden berichtet.
The Dresden branch is also engaged in forecasting
business trends.Twice a year, forecasts on the development of Saxony's economy and labour market are
issued. Before publication, the results are presented
and discussed in the workgroup Arbeitskreis Konjunktur,
which is organized by Ifo Dresden.
Structural Change and Competitiveness
of Saxony and the Eastern German Economy
Innovation activities are of central importance for the
competitiveness of industry in eastern Germany. Based on
Ifo surveys, these developments are analysed at the
Dresden branch. The survey results also allow
statements on innovation behaviour of Saxony’s industry.The results of the reporting year 2003 showed that
the weakness of economic activity in recent years
negatively affected the willingness of German enterprises to invest in new products and processes. This
development was also observed in the industrial
sector in Saxony. The medium-term prospects of the
sales market for Saxony’s enterprises indicate a moderate expansion of sales growth in the coming years
and positive impacts on the innovation climate.
Main research areas of the Dresden Branch are:
– business cycle analysis in Saxony and in eastern
Germany,
– structural change and competitiveness of Saxony
and the east German economy,
– the transformation progress of Central and Eastern
European Countries; impact of the EU Enlargement
on Saxony and the New Länder,
– the impact of regional and structural policy programmes,
Industry in Saxony on the
growth path
Based on analyses of the profitability of eastern
German industry, the Ifo Institute surveyed the profit
margin of industry for 2001 and 2002. The analysis of
profitability showed that eastern German industry was
less affected by the economic downturn than industry
in western Germany. For example, the profit margin in
east Germany remained at a low but stable level. In
2001, sales in west German industry dropped significantly and in 2002 the profit margin in west Germany
converged toward the lower eastern German level of
1.4%.The level of the profit margin is currently too low
to finance investments, which are necessary for growth
in east German industry. Wage increases or further
reductions of working hours towards the west
German level are therefore not advisable. Detailed
results were published in the journal ifo Dresden
berichtet.
– fiscal policy in Saxony and in the New Länder.
Business Cycles in Saxony and Eastern
Germany
The Ifo Institute regularly calculates the Ifo Business
Climate for Saxony, a reliable indicator for business in
industry, construction and trade on the basis of surveys
conducted among entrepreneurs in Saxony.The results
are regularly published in the periodical Wirtschaftstelegramm issued by the Saxon Ministry of Economic
Affairs and Labour and in the daily newspaper
Sächsische Zeitung.
Moreover the Dresden branch delivers a detailed analysis of the current economic development in different
industrial sectors. Several articles based on the results
of the business trend survey for the service sector in
eastern Germany and the automobile trade and repair
In a medium-term perspective, industry in Saxony is on
a growth path. The turnover of Saxon enterprises in-
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Ifo Annual Repor t 2003
Dresden Branch
creased between 1995 and 2002 at a rate well above
the average of the other eastern German states as well
as that of the western German states. This development reflects a structural change within the manufacturing industry. Saxon industry has become increasingly
specialised in technology and human-capital-intensive
production. This development is also of vital importance to the trade relations with the neighbouring
countries, the Czech Republic and Poland.
Ifo welfare proposal:
Consequences for Saxony
neighbouring countries in 2004 with regard to gross
value added and employment. It is important to stress
that, in the medium term, the accession countries will
not be able to use their significant advantages in labour
cost in the small-business and services sectors.
In particular, the Leipzig region is likely to benefit from
the Eastern enlargement of the European Union. On
the one hand, many human-capital-intensive activities
are located in this region. On the other hand, due to
the greater distance to the border, labour-intensive
and the less human-capital-intensive small-business and
service sectors are protected to a larger extent from
pressure from Polish and Czech competitors.
In spring 2002, Ifo published a welfare-to-work-model,
a detailed proposal for a reform of the German welfare
system. The reform proposed by Ifo is based on three
main elements. First, welfare benefits should
be reduced substantially to the level of the current
housing benefits (“Wohngeld”) to decrease the lower
boundary for market wages. Secondly, workers who
accept a low-paid regular job will receive a new earned
income tax credit. Thirdly, a worker who cannot find
regular private sector employment will be offered a
job in public agencies. The proposed welfare scheme
ensures that former welfare recipients can earn incomes – consisting of welfare benefits, wages and the
tax credit – well above the current welfare payments
and that the fiscal burden of the welfare state can be
reduced. The Ifo Dresden branch is examining the
possible implementation of this proposal in Saxony and
its consequences.
Altogether, the impact of EU enlargement on Saxony’s
economy depends very much on the willingness to innovate and the flexibility of Saxon enterprises. The
findings of the survey show that many small and
medium-sized enterprises (also in the border regions)
are currently not aware of the consequences of EU
eastward enlargement.
Budgets and Fiscal Policy of the Länder
In the field of public finance, research focussed on longterm forecasts of Saxony’s budget figures, on the
budgetary impact of demographic change and on the
problems of financing public infrastructure.
Transformation Progress of Central and
Eastern European Countries
Effects of EU Eastern Enlargement on
Saxony and Eastern Germany
The discussion on the consequences of demographic
change has primarily focussed on the social insurance
system. However, also the general state budget is significantly affected by demographic change. A simulation
study by the Ifo Dresden branch shows that pensions
for public servants (German: “Beamte”) will create
severe pressure on state coffers in the future. This is
especially true for the eastern German states since
a system of public administration needed to be established immediately after German Unification in 1990.
Civil servants in eastern Germany are considerably
younger than in the west and concentrates on people
between 40 and 45. This will lead to a considerable
increase in public pension expenditures throughout
the next 20 years. Without any reform, expenditures
for public pensions would increase from currently
EUR 25 million to more than EUR 1.2 billion in 2040.
In order to maintain some leeway for future public
On behalf of the Saxon Ministry of Economic Affairs
and Labour, Ifo Dresden analysed the impact of EU
enlargement on the economy and on the labour
market in Saxony. The study draws a mixed picture of
the consequences of EU eastward enlargement for
industries and regions in Saxony.
The enlargement of the market entails positive effects
for human-capital-intensive industries and/or enterprises. Because of the persisting advantage in labour
costs in Central and Eastern European countries, labour
intensive industries and enterprises, however, will face
increasing competition. On balance, Saxony will experience a positive impulse from the accession of its
Ifo Annual Repor t 2003
68
Dresden Branch
Assessment of Locational Quality by Firms that
Produce at More than Two Locations
This study on the impact
of EU enlargement identifies
the specific weaknesses and
strengths of the Saxon economy and proposes useful
strategies to cope with the
upcoming challenges, especially with regard to the expected labour market frictions. EU enlargement will
dismantle existing barriers
for capital, goods and services, and – after a transitional period – for labour.
Based on criteria from economic theory, the study analyses the location quality of
Saxony as an industrial area.
The study takes both a regional and structural point
of view. The picture that
is drawn on the basis of economic indicators in Saxony, Poland and the Czech
Republic matches results of a survey of international
investors. While Poland and the Czech Republic
are more competitive with regard to labour costs,
Saxony (as well as the other east German states)
profits from a well-developed infrastructure (transport, communication, education and research). There
are also remarkable advantages in the regulatory
framework for enterprises in Germany (e.g. bureaucratic efficiency, political stability, transparency of
legal and administrative rules, effectiveness of the
judicature).
Source: Ifo enterprise poll in 2003.
investments, both reforms of the public pension
scheme as well as general cost reduction programmes
are inevitable.
Ifo Dresden developed a simulation model to analyse
the impact of alternative strategies of fiscal policy on
the public budget.The Ifo budget model was extended
to take into account grants, the legal rules for the use
of these grants and co-financing procedures to take into
account future changes in the transfers to the New
Laender.The simulations show that the range of options
for future investments will decrease significantly.
Economic adjustment in
Saxony to EU enlargement
Because of these differences, in the locational factors it
might be expected that different industries will follow
different developments in the future. Many enterprises
plan to open up subsidiaries in the new EU member
countries. However, the consequences of EU Eastward
enlargement will not affect all sectors to the same
degree. Human-capital-intensive sectors might profit
from the enlargement of the EU area, while labour
intensive sectors are likely to further lose competitiveness. Especially low-skilled workers will suffer from this
development.
Projects Completed in 2003:
Analysis of the Impact of Eastward EU
Enlargement on the Economy and Labour
Market in Saxony
W. Gerstenberger, B. Grundig, C. Pohl, H. Schmalholz,
C. Vögtle, M. Votteler, M. Werding, H. Hofmann for
the Saxon Ministry of Economic Affairs and Labour,
December 2002 to December 2003, published in: ifo
dresden studien 35, Munich, Dresden 2004.
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Ifo Annual Repor t 2003
Dresden Branch
Development Outlook for Locations of Producing Enterprises
Alternatives
for the
locations
… % of enterprises a) plan in future for locations in …-
Poland
CEE
countries
Bulgaria /
Romania
Saxony
Rest
of east
Germany
12
10
12
24
6
5
Expansion
57
60
56
41
31
35
Status quo
25
24
32
35
50
50
Reduction
1
3
0
0
6
5
Closure
4
3
0
0
8
4
Czech
Republic
Establishment
a) The firms could give data on several countries/regions. The number of responses – added up by countries/regions – is thus larger
than the number of participating firms.
Source: Ifo enterprise poll in 2003.
Optimistic outlook for
Saxony
Scientific Assessment of the Saxony 2030
Energy Programme
W. Gerstenberger, H.-D. Karl for the IER Institute of
Power Supply and Rational Energy Use, Stuttgart,
November 2002 to August 2003.
comes up with an optimistic scenario of an above-average rise in GDP. However, the increasing competitive
pressure resulting from EU enlargement will bring
about problems for sectors that produce with a low
content of human capital.
On behalf of the Saxon Ministry of Economic Affairs
and Labour, the IER institute has developed a new
energy program for the Federal State of Saxony. Ifo’s
Dresden branch made a projection of the economic
and demographic development in Saxony until 2030.
The simulation is based on national accounting and
long-term forecasts of population, economic and
labour-market figures.
The simulation also implies that an increasing share of
workers will switch to the services sector.
European Regional Prospects 2003
M. Votteler for Cambridge Econometrics Ltd., January
2003 to March 2003, published in: European Economic
Research and Advisory Consortium, ERECO (ed.),
Growth in Saxony in Comparison to Germany
The development of the Saxon economy is primarily
influenced by
– the success of maintaining the advantages in locational factors in comparison to the new EU member
countries
– the further development of the declining construction sector and its competitiveness in comparison to
Polish and Czech enterprises after 2011
– the development of the state budget in Saxony
– the success of the reforms of the labour market and
of the welfare system
Although there are several interfering effects on economic growth up to 2030 in Saxony, the simulation
Ifo Annual Repor t 2003
Source: Arbeitskreis Volkswirtschaftliche Gesamtrechnungen; calculations
and estimates by the Ifo Institute.
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Dresden Branch
European Regional Prospects, Analysis and Forecasts to
the Year 2007 for European Cities and Regions, Rotterdam 2003, and in: ifo Dresden berichtet Nr. 1/2004.
is directed by the Centre of Technology and
Innovation Bautzen and that employs the experience
of Ifo Dresden.
Within the project the structural regional development of the so-called “NUTS-2 Regions” is analysed.
The study is based on regional forecasts for the next
six years generated by Cambridge Econometrics Ltd.
The forecasts refer to variables such as population,
employment and gross value added.
The project aims at improving the competitiveness of
the region’s economy. Its main focus is the development of an innovation management system to co-ordinate and support projects in the private as well as in
the public sector. The innovation management system
will act on a regional level but it is also integrated in
cross-regional lnetworks.
Employment and the Labour Market in Saxony
to 2030
Improving regional
competitiveness where
Poland, the Czech Republic
and Saxony converge
A comprehensive audit of the existing know-how and
of the future needs of companies in the region has
identified the economically most viable areas of technology. Ifo has provided the methodological knowhow.The second stage is to develop the resources and
methods to support these areas. One tool will be the
creation of an Internet-based innovation platform as a
central information hub for the Oberlausitz region, and
in time the project group will develop the tools to
access the experiences of other European regions.
The development of a regional innovation strategy
(RIS) has been in progress for about one year and will
be finished by the end of 2004. Especially the region’s
geographical position within the heart of Europe, bordering Poland and the Czech Republic, makes crossborder co-operation a critical success factor. Besides
activities to enhance co-operation between the several members of the regional innovation system, the
support of regionally significant clusters will be one of
the most important items of the strategy.
Source: Arbeitskreis Volkswirtschaftliche Gesamtrechnungen; Bundesagentur für Arbeit; calculations and estimates by the Ifo Institute.
The results will be published after completion of the
project.
Current Projects:
InnoDreiländereck
H. Schmalholz for the Centre of Technology and Foundation Bautzen (Technologie- und Gründerzentrum
Bautzen), January 2003 to December 2004.
Public infrastructure and municipal
finances
T. Fester, M.Thum in co-operation with H. Seitz (European University Viadrina, EUV Frankfurt/Oder) for the
Bundesamt für Bauwesen und Raumordnung, August
2003 to September 2004.
InnoSachsen is a regional programme of the Saxon
State Government for “Innovative Actions under the
European Regional Development Funds” (ERDF) by
the European Commission. For the project “InnoDreiländereck (InnoTriang)” a consortium was formed that
A well-developed local infrastructure cam be seen as
a precondition to economic growth and job creation.
In spite of further investment needs, especially in struc-
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Ifo Annual Repor t 2003
Dresden Branch
Analysing local infra-
turally weak areas, material investments have declined
significantly over the last ten years. The financial situation of municipalities has deteriorated dramatically.
Reform of Social Assistance in the New
Federal States in Germany
B. Grundig, M.Thum, June 2003 to December 2004.
The project collects information on revenues and
expenditures of municipalities, estimates investment
needs, evaluates the use of investment grants and
formulates recommendations for future support programmes.
One of the main policy issues in Germany concerns
reforms of social assistance and unemployment
assistance to promote employment for the low-skilled.
All current proposals have in common that they design
schemes for Germany as a whole. Regional differences
in the starting position have not been taken into
account. However, due to the special situation of
labour markets and public finances in eastern German
states this is a serious shortcoming.This project intends
to focus on the consequences of the reforms for
the regional labour market and aims at identifying a
sustainable strategy for eastern Germany.
structure
The results will be published after completion of the
project.
Demographic Development of the Free State
of Saxony: Analysis and Strategies Regarding
the Decline of Population on the Labour
Market
W. Gerstenberger, B. Grundig, C. Pohl, H. Schmalholz,
M. Thum, M. Dittrich, G. Markwardt for the Sächsische
Staatskanzlei, November 2003 to March 2004.
Development of Expenditures for Public
pensions in the Eastern German States
T. Fester, M.Thum, January 2003 to December 2004.
In the next twenty years demographic change will
also influence the Saxon labour market. Due to a declining working-age population, the labour supply will
shrink. A still open question is how this change
in labour supply will affect the labour market as a
whole. For example, it could result in regional shifts or
in a lack of essential skill in the labour market. The
demographic change might also affect labour demand
in a way that innovative companies will fear locational
disadvantages because of the shortage of young, highskilled people.
Impact of lower population
Germany is undergoing demographic changes that will
force major adjustments in the social insurance system.
The current discussion of social insurance reforms has
made this evident to everyone in Germany. While the
increasing burdens in the state social insurance system
are well known, there has been little discussion about
the second big system of pension insurance in
Germany, the pension system of public officials. Here
too the ageing of the population will have its effects
and burden the public budgets.The rise of pension burdens for public officials will be even greater than for the
state retirement insurance system.The project analyses
future trends in the pension system for government
officials by using a simulation model. Calculations for
the Free State of Saxony show that precisely in east
Germany, the rise of government pension burdens will
lead to considerable fiscal problems.
The objective of the study is to screen possible fields
for political activity to reduce the long-term loss of
human capital and to quantify effects of such policies.
Identified fields are controlled migration of high-skilled
people, higher labour force participation of high-skilled
women and older people and, finally, to the creation of
new human capital.
The publication of the results in the journal ifo Dresden berichtet and as in ifo Dresden studien will follow
after completion of the project.
Ifo Annual Repor t 2003
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