Abstract

Over the last 15 years the world has experienced an impressive process of convergence: in the poorest countries, production and income have increased by twice the rates of the richest ones. Large areas in two industrialized EU countries, southern Italy and eastern Germany, have been however incapable of taking the opportunity coming from a large availability of underutilized workers to increase production and income. This is particularly baffling, since no poor country has ever received external transfers comparable to those obtained by the two "Mezzogiornos" of Europe. The main reasons for this failure have been the following: 1) both in Italy and Germany the equalization of wages across regions has kept the price of labour too high with respect to productivity in South Italy and East Germany; 2) transfers from West Germany and northern Italy have been directed at subsidizing living standards, rather than stimulating competitiveness and employment in East Germany and southern Italy.