About the CIA and a glass of red wine ...

Mr Ludwig, how did it all start with IAW and IWH?

Several non-academic economic institutes ran initiatives to establish contact between East and West when the demise of East Germany became foreseeable, but they also originated from the Federal Ministry for Economic Affairs.  The Ministry had already despatched its "scouts" to East Germany in 1989/1990, because there was a huge need for information about the true state of the economy and very little confidence in East German economic policymakers in general. So suddenly, a CIA man was standing outside my office wanting to talk about the current situation. So much happened around then! The Ministry ultimately decided to make IAW the nucleus for the subsequent IWH. But there's one question that only a few witnesses can answer: why was Halle actually chosen as the location?

So why?

Berlin wasn't an option, because there was already a publically funded institute there, namely DIW. So effectively, there were only another five federal states to choose from: Brandenburg, Saxony, Thuringia, Saxony-Anhalt and Mecklenburg-Vorpommern. Mecklenburg-Vorpommern was too far away and Brandenburg turned down the idea, because it didn't have the money. Saxony was the focus – a delegation had already been there, looking for a building in Dresden. But an offshoot of the Institute for Economic and Social Research had already existed in Leipzig since 1990. And then, I think, the FDP (Free Democratic Party) came into play. The Minister for Economic Affairs in Bonn was a member of the party, and it was very influential in Saxony-Anhalt during the transitional period. Not to forget the Foreign Minister, Hans-Dietrich Genscher, who came from a suburb of Halle. So the focus shifted to Saxony-Anhalt, with Halle as the location. Legend has it that the deal was sealed over a glass of wine in the "Goldene Rose" pub in December 1991.

And how did you personally become involved?

The Akademie der Wissenschaften (Academy of Sciences) in Berlin, where I'd completed the first part of my academic career, had closed in 1991. For an unemployed academic, there was either a job creation scheme or the so-called Academic Integration Programme, which helped with the recruitment of Academy researchers in West German science projects. The explanation of my rejection read: "With your ideas, you would be better suited to a non-academic post" (laughs). I then applied for a job as Head of Department at the newly founded IWH. The application process was a real audition in "many guises", in front of a committee that included not entirely sympathetic politicians and economists from former West Germany. Candidates from the former GDR were put under general suspicion. If you'd been a member of the Pioneer Organisation during your school days, for example, this alone could be a reason for rejection. In the West, this organisation seemed to be considered almost an elite political group. I passed the test and was appointed acting Head of the Economics and Growth Department at IWH.

How was the first President chosen?

The Founding President had already been chosen with the appointment of Mr Wegner as the new Head of IAW, initiated in advance by the Federal Ministry for Economic Affairs. But the subsequent President of the Institute still had to be found. Mr Wegner sought suitable candidates among prominent economists at other West German institutes. In one case, this led to "bad blood" between the institute directors, when his actions became known. But recruitment processes were also initiated by higher authorities from the West German political scene. So ultimately, a member of the Council of Experts was chosen, namely Rüdiger Pohl.

In your opinion, what have been the IWH milestones?

The real challenge was that we started completely from scratch and had to establish the research programme for scientific monitoring of the transformation processes using our own database in a relatively short time. The Institute was also based in the East, because this policy promised "contact benefits". At that time, Ms Loose and I travelled extensively throughout the country, for example to find volunteers – or willing participants - for corporate surveys. Future generations were spared this turbulent legwork, and they found a "ready-made nest", as it were.

We former GDR researchers had little experience of economic research and the entire operation had to be organised from the bottom up. But we were willing and eager to learn. We had input from colleagues from the West, especially when we participated early on in the Joint Economic Forecast by the leading German economic research institutes. Despite the initially disparaging attitudes of some older colleagues from the West German institutes, we subsequently enjoyed perfectly normal, friendly and respectful dealings with each other. Above all, IWH succeeded in fully occupying a niche among the competing institutes: the economic reconstruction processes in the East following the collapse of the system in the GDR and central and eastern Europe, as well as the reversal of an economic system, for which there was no historical paradigm.

How was the empirical database for economic research in East Germany, the national accounts, organised following unification?

The national accounts system faced a fundamental problem in 1990: Should a separate accounts system be established for the former GDR territory or should the existing economic account for former West German territory simply be expanded to include the new federal states? And how should this be done? The politicians initially opted for parallel accounts systems per economic area, plus one for Germany as a whole. The consequences of this were data collection and new accounts concepts for economic performance in the East according to West German statistical concepts. When the Federal Statistical Office abandoned this procedure in 1995, we at IWH and DIW continued to perform some of the calculations for the East by ourselves and created our own database for quarterly economic monitoring. At the end of the 1990s, we then converted our system to use the data from the West German national accounts system.

From your perspective, when did IWH decide to move away from its East German focus?

The research profile had unfortunately narrowed considerably to East Germany when the "Central and Eastern Europe" Department closed in 2005. However, discussions about the realignment of the research profile had already taken place during Mr Pohl's Presidency. In around 2000, we increasingly discussed the fact that the days of nation statehood were over and that the openness of national economies was increasing so rapidly that economic forecasts for individual states and regions were obsolete. At that time, he was already concerned to focus more on the integration of countries with open borders in Europe. We later embraced this idea with the development of our new motto, "From transition to European integration".

How was the decision then made to focus on financial markets?

The Macroeconomics Department had taken initial steps in this direction before the financial crisis, without us initially being aware of how dramatically and profoundly a crisis on the financial markets would affect the economy. But economic implications were probably viewed in the very short term. IWH's strong focus on financial markets certainly arose to a large extent due to the appointment of Ms Buch as President. Wagging tongues claim that institutes used to elect a president, but now they recruit an institute for a president.

What was one of the best moments for you?

One highlight was definitely when my team was named "Forecaster of the Year" by the "Financial Times Deutschland" in 2004. But every development stage at IWH had a special attraction: For me, the best times were the initial years with Mr Wegner during the early IWH start-up and expansion phase, when there was lots of creative scope and everything was new. The addition of new topics and increase in staff under Mr Pohl brought a "breath of fresh air" to our research. He encouraged our intellectual development by repeatedly questioning our opinions and analyses with his keen analytical mind. But his management style was also very strict. Another culture was adopted with the arrival of Mr Blum, because he was more open. In the meantime, many good researchers had unfortunately left the Institute's individual, relatively small departments and sought new challenges, moving to government ministries, for example. Back then, this was new to me and I had to learn that staff turnover is very high in such an institute, because many regard their time here as a stepping stone on the career ladder. Despite a lengthy search for a successor, we were unable to compensate for the departure of Hilmar Schneider to IZA, who was then Head Employment Market Department at IWH, an area which was much in demand and involved a lot of research. The department was closed in 2006.

How do you see the future of IWH, i.e. a brief outlook from your perspective?

I think this very much depends on external forces. The fact that two evaluations failed during Mr Blum's time, for example, wasn't only due to the mistrust in certain quarters for the Institute’s new focus, but simply a matter of bad luck. At the time, prominent colleagues sat on the evaluation committees, who regarded Mr Blum's specialist area of "industrial economics" as a rival to their own. Mr Blum was therefore in a difficult position from the outset. In addition, the committee wasn't convinced by some of his staffing decisions, so that ultimately the evaluation wasn't good enough.

So it is not your belief that these evaluations are indicative of a sharp decline in the Institute's performance?

By 2004 at the latest, under Mr Blum's presidency, the Institute had already begun to rethink its performance criteria. Greater emphasis was placed on publications in peer-reviewed academic journals, for example. There was also a benchmark that each employee had to publish one paper each year in order to meet the criterion more or less. But this couldn't be implemented overnight. The real task of IWH remained economic policy advice.

What are your hopes for the future of the IWH?

Survival. The competitive environment has become much tougher. So you have to explore new areas and develop new strategies in order to continue to exist. It helps to define a specific content focus for which there is as little competition as possible.

Udo Ludwig joined the IWH in 1992 from the Akademie der Wissenschaften (Academy of Sciences) in Berlin. Until 2009 Udo Ludwig was Head of the Department "Economic Outlook and Growth". He is now Economist in the Department of Macroeconomics.