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Depressing Dependence? Transfers and Economic Growth in the German States

Most countries pay substantial intergovernmental transfers to poor regions with the aim of achieving regional convergence. Consequently, transfers should have a positive effect on economic growth. However, it is equally possible that transfers perpetuate under-development. This paper studies empirically the effect of intergovernmental transfers on economic growth with a panel of West German states over the period 1975-2005. The findings suggest that transfers do not foster economic growth, presumably because the recipients use them to subsidize declining industries.

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