Poor but sexy (Economist.com)

Poor but sexy
Sep 21st 2006 BERLIN
From The Economist print edition

A fashionable Social Democratic fief needs a stronger economic revival

DOES politics matter in a city with unemployment of over 17% and a debt of €63 billion ($80 billion)? Klaus Wowereit, Berlin's Social Democratic mayor, jibs at the question. Naturally, he says, politics is not just about spending money—witness his pay cuts for civil servants. Now he has five more years in which to prove his point. In Germany's state elections on September 17th the Christian Democrats did badly, and the Social Democrats lost ground in Mecklenburg-West Pomerania (where the neo-Nazi National Democratic Party, or NPD, won a few seats in the state parliament). But Mr Wowereit did well in Berlin. He may now swap his coalition partner, the Left Party, for the Greens.

His big task is to help Berlin avoid the 1990s fate of Washington, DC: of being a bankrupt city with a rich political ghetto. After unification in 1990 Berliners hoped to regain their role of industrial hub and gateway to central Europe. Instead, the city lost two-thirds of its jobs in manufacturing, which now employs fewer than 100,000 in a population of 3.4m. Berlin resembles a glitzy shopping mall with lots of smart boutiques but no anchor tenant.

One reason is that “West Berlin was almost as socialist as East Berlin”, says Eric Schweitzer of the local chamber of commerce. During the cold war both halves of the city were heavily subsidised, but the money dried up after unification. The legacy was one of uncompetitive firms, a huge bureaucracy and an ingrained welfare mentality. Heavyweight firms that moved out after 1945, such as Siemens and Deutsche Bank, saw no reason to return. The results are visible as soon as one strays beyond the smart government district around the Brandenburg Gate or the posh neighbourhoods near Kurfürstendamm. Signs of poverty are everywhere. One-third of children in Berlin are poor.

Yet a new economy is gradually emerging. Hip Prenzlauer Berg is now home to a bevy of small fashion designers. The banks of the River Spree have become the base for Universal Music, MTV and other media firms. Farther south is Adlershof, a sprawling technology park. “Faster than any other large city in the world, Berlin needed to develop a new economic profile—and it is happening,” says Kurt Geppert of the German Institute for Economic Research, or DIW. Jobs in software, media and advertising are growing fast. Berlin now has a mix of technology, talent and tolerance that attracts skilled people and breeds growth. Spending on R&D is above average, thanks largely to the city's three universities, which also lure foreigners, artists, musicians and others.

Indeed, Berlin is now Europe's liveliest city after sunset. Since the glamour of the football World Cup final in July, barely a week has passed without a big event. Twenty-somethings jet in on low-cost airlines for the all-night club scene. There is a relaxed openness not found in straiter-laced European capitals. “It does not take much convincing to get good programmers to relocate here,” notes Ludwig von Reiche, a software manager who is chairman of the Berlin branch of the American Chamber of Commerce. Rents are cheap: a renovated four-bedroomed flat costs as much as a claustrophobic London studio.

All of which may make one wonder why Berlin is not booming already. One reason is a lack of entrepreneurial spirit, says Klaus Brake of the Berlin-based Centre for Metropolitan Studies. Almost half of Berliners live on benefits. Mechanisms for turning an idea into a product are underdeveloped; there is no private venture capital, and most firms are conservative. Despite Mr Wowereit's cuts, Berlin is still far from being an efficient state. The city has yet to sell its public-housing agencies. It boasts of offering a one-stop service for investors, but local municipalities have plenty of red tape of their own.

At the top, too, there is room for improvement. Mr Wowereit, who is openly gay, is a good face for Berlin; he calls it “poor but sexy”. But “Wowi”, as he is known, is a political operator, not a visionary. Berlin does not always do its best to attract skilled staff. Many foreign teachers, for instance, are denied equal pay, since their credentials are not accepted as of equal worth; this makes it far harder for bilingual schools to retain staff.

The challenge for Mr Wowereit is to balance the interests of Berlin's new elite with those of ordinary folk. It will not get any easier, since even Berlin's creative industries are unlikely to create enough jobs for the out-of-work. Despite Mr Wowereit's win, the election in Berlin was also a warning. Turnout hit a low of 58%, and as many as 13.7% voted for splinter parties (including a chunk for the NPD). Even in the capital, it seems, politics still matters.