JENA, Germany (Reuters) - From the 12th floor of Jenoptik’s headquarters, chief executive Stefan Traeger points to his laser factory and the university that provides it with talent. Welcome to “Optics Valley” - a role model for Germany’s East in a big year for the region.

Three elections in eastern states this autumn are focusing the minds of Chancellor Angela Merkel and her allies, who want to win over voters unhappy that their living standards still lag the West 30 years after the fall of the Berlin Wall.

They have work to do. The East was given big promises after reunification but its economy languished.

After cash injections of 2 trillion euros (£1.7 trillion) over three decades, the East’s economic output per capita is still three quarters of western German levels.

But the East is slowly closing the gap and several tech hubs are giving it hope of catching - and maybe eventually overtaking - the West.

In Jena, Traeger says his predecessors turned “the ruins of the old East German Carl Zeiss conglomerate” into Jenoptik - a multinational lasers and imaging equipment group.

With most of the East’s old industries long gone, Merkel’s government is trying to encourage hubs like Jena to profit from disruptive new technologies.

“I do feel at times that here in the East, still today, there is this feeling of ‘well, maybe it’s okay that we just play’. No, we want to win,” Traeger told Reuters after presenting record earnings for 2018 and a bullish outlook.

Many East German firms closed after reunification, so why was Jenoptik different? Traeger says its first CEO, Lothar Spaeth, a former premier of Baden-Wuerttemberg in Germany’s West, saw potential to create a world-class business out of an “unpolished gemstone”.

With the aid of government loans, Spaeth built Jenoptik from the Carl Zeiss group, but at a price.

“It was a very difficult time. Several thousand people lost their jobs,” said Helmut Bernitzki, 62, who joined the forerunner to Jenoptik in 1984.

“We had to expand into new markets,” Bernitzki, now an expert in optical coatings at Jenoptik, said. “We fought to be profitable and to create jobs here again.”

In a city of 110,000 inhabitants, 22,000 of them students, Jenoptik has channelled ideas from the university into specialised laser and optics products to give the company a technological edge.

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PRODUCTIVITY PREMIUM

The upshot is high productivity: Jena’s output per worker is the highest in the eastern state of Thuringia, and slightly higher than towns like Bielefeld and Bochum in the western state of North Rhine-Westphalia, Federal Statistics Office data show.

“Here in the ‘Optics Valley’ in Jena, we have a very closely connected community and it does feel like Silicon Valley, on a smaller scale,” said Traeger.

He aims to turn ideas stimulated by Jena’s university into high-tech products that “create and justify price premiums”.

Generating this added value has eluded other industries in Germany’s East. Solar power firms made a promising start in the early 2000s before Asian rivals undercut many of them, with the loss of thousands of jobs.

Developing products that rivals cannot beat on price is the holy grail for the optics, biotech and artificial intelligence start-ups taking root in the East - many around universities and research institutes.

But for the East as a whole, productivity was three quarters the western average in 2017, the latest government figures show.

“The availability of skilled labour is much lower in east Germany,” said Reint Gropp, head of the Halle Institute for Economic Research (IWH).

His policy prescription: make the East more attractive to qualified migrants, and invest in universities, research facilities and urban centres. In short, be more like Jena, home to the Fraunhofer optics research institute and the Friedrich Schiller University, where 14 percent of students are foreign.

The East’s appeal to foreigners took a hit last year, however, when Chemnitz, a town east of Jena, saw Germany’s most violent right-wing protests in decades after the killing of a German man, for which two immigrants were arrested and one later released.

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INNOVATION CLUSTERS

The federal government is now encouraging high-tech hubs in Berlin, Potsdam, Leipzig, Dresden and Jena.

The initiatives are bearing fruit. For the first time since reunification, more people moved from the West to the East - excluding booming Berlin - in 2017 than the other way around, government figures show. Small and mid-sized enterprises are driving the revival.

Success stories include Halle-based ProBioDrug, which is developing products to treat Alzheimer’s disease, and Jena medical devices maker Avatera Medical, which people close to the matter say is considering a stock market flotation.

Not all areas are thriving. In the Lausitz region south of Berlin, plans to phase out coal mining are worrying locals.

Unemployment in the East - at 6.7 percent - is still 2 points higher than in the West, and the population is older.

Easterners also feel their prospects are poorer. A recent study by the DeZIM institute for research on integration found a third of ‘Ossies’ believe they are treated as second-class citizens, about the same proportion as Muslims.

FAR-RIGHT CURSE

In Jena, mayor Thomas Nitzsche wants to export his city’s success to surrounding areas, where the far-right and left play on people’s fears of being left behind.

Between 1990 and 2016, the East’s population fell by 11.2 percent to 16.2 million, government figures show. The number of working-age people is expected to decline up to 2030, with those over 65 rising to a third from a quarter.

Nitzsche is trying to meet Jena’s demand for talent.

“Even if we retained all the school leavers and university graduates we have here, that would still be too few,” said Nitzsche, a liberal Free Democrat.

“So we need to attract people here - not just from Thuringia, but across the country and abroad.”

Ahead of the regional elections on Sept. 1 in Brandenburg and Saxony and on Oct. 27 in Thuringia, the anti-immigration Alternative for Germany (AfD) is polling close to 20 percent in all three states - putting it in second or third place.

None of the major parties want to share power with the AfD. Mainstream politicians, business leaders and think-tanks agree: the East can continue on an upward trajectory if remains open to skilled outsiders to help its young firms grow.

The East, said Gropp at the IWH institute, has less to lose by taking a chance on new technologies than the West, where the auto sector and other mature industries face challenges from innovations like electric cars.

“East Germany has a better chance of handling this more disruptive structural change, which can take place much more easily in new firms,” Gropp said. Could the East even overtake the West? “I think it could, absolutely.”