Governments around the world are fostering industrial ‘clusters’, hoping to create agglomeration economies. Using the political division of Germany in 1949, this column argues that heightened firm density can raise costs for incumbent firms in addition to the often-cited agglomeration benefits. This is important for policymakers contemplating efforts to promote their local areas by targeted cluster initiatives and bidding to attract large firms. Policy efforts that are neutral in orientation – such as physical infrastructure investments or improving the generation and dissemination of knowledge – may be more effective alternatives.

Twenty years after the fall of the Berlin wall, Germany’s political unification has succeeded. This column argues that its economic unification has not – East German growth has been very disappointing and pulled down the economy as a whole. It blames policies that raised East German wages above market levels.