Will East Germany become a new Mezzogiorno?

Despite massive regional policy efforts, GDP per capita in Southern Italy has only briefly converged on Northern Italian levels in the 1960's. Failure of convergence since then is associated with a policy switch from investment toward income maintenance, with reduced wage sensitivity to regional labor market conditions and with increases in rent-seeking opportunities and corruption. East Germany's early experience of rapid wage and income, but not productivity, convergence raised fears that a Mezzogiorno scenario could be repeated. Since then, however, investment and productivity have risen while wage setting has become more flexible. Given East Germany's greater ''social capability'' for growth, and provided that investment continues to be encouraged, the prospects for convergence are now more promising. (C) 1997 Academic Press.