Optimizing German regional policy -2004 : a study based on empirical data from 1994 to 2001

Reducing disparities among regions within European countries together with economic development is the aim of European and national structural policies. In particular, a European grant contributes to the German governmental program for reducing and equalizing regional unemployment. The goal is to bring unemployment down to the national average by creating new and/or by safeguarding existing jobs, which also contributes to decreasing national unemployment and to GDP growth. The distribution of available aid among 271 German labor market regions is considered as an econometric decision problem with three targets: (1) minimization of unemployment, (2) maximization of GDP, and (3) equalization of regional unemployment rates, subject to the budget constraint and some administrative restrictions. To prepare grounds for optimization, econometric predictions are made for the year 2004 from regional data 1994-2001. Compared with the previous Discussion Paper 115, the given work contains four new items: ø The German regional policy is optimized not only with regard to equalizing the regional unemployment, but also with regard to reducing national unemployment and GDP growth. ø The source data are extended from a single period of observations 2000-2001 to yearly data 1994{2001. ø The analysis of past developments is no longer the goal of the model but a means to make decisions for the future. ø The number of control parameters is reduced to a necessary minimum implemented in a user interface in form of tables and figures visualizing the topology of optimal planning. The model can be regarded as a prototype of decision-aid for designing regional policy at national and European levels.